In my article, “What is the best way to grow your money,” I said that your hard-earned money has the potential to maximize its growth simply by investing it. But you ask, “What does it mean to invest and how do I start?”
Investopedia defines investing as “the act of committing money or capital to an endeavor (a business, project, real estate, etc.) with the expectation of obtaining an additional income or profit.”
If you are a beginning investor and you do not have any idea how to start, then you need to start with the basics. So here are some of the basic principles of investing for beginners that you should understand before investing your money.
A. First things first, get your house in order.
Before you even think about investing, you need to know where you are financially. What is your current net worth? What is your monthly income and expenses? How much debt are you carrying? Do you have enough savings?
Know where your money goes each month by tracking your spending habits. Think of ways to reduce your expenses, pay off any existing debt, get yourself health and life insurance, and build up an emergency fund to cover three to six months of expenses. That way, you will be on sound financial ground and able to invest well.
B. Invest in knowledge. Never invest in anything that you do not understand.
People almost always end up losing their life savings when they invest in things they do not understand. So always do your homework because as they say, “knowledge is power.”
If you’re considering investing in stocks, research companies until you understand them. But if you think you will not have time or do not desire to learn all these things, consider mutual funds, especially index funds.
You may also want to seek professional assistance. If you do not know where and how to start, get some help. Find a trusted financial adviser who is willing to teach, not an adviser that is interested only in selling.
And even if you let others handle your financial affairs, remain involved to some degree in order to make sure that your money is being spent wisely.
C. Begin investing now, don’t procrastinate.
The best time to begin investing is NOW because an early start can make all the difference. An early start is sure to provide a long time horizon for compounding to show its true benefit for the investor. The sooner you start the easier it is to accumulate and build your wealth.
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D. Invest regularly.
The key to building wealth is investing regularly. But suppose you have some money and you want to invest it, should you invest it all at one time or divide it into smaller amounts and invest them each month? Obviously, the more you invest, the more you will eventually make.
However, this does not mean you should invest a large amount of money at once. Research shows that your money has the potential to earn more when invested regularly, that is, every month or a set period throughout the year, as you do not have to worry about timing the market. Just be confident that bad months will be outweighed by good ones over the long term.
Regular investing is also beneficial both for small investors in slowly building up their portfolio and those who have a large sum to invest but are fearful of going all in at once.
E. Invest long term.
When it comes to investing, time is your best friend. But how do you decide what constitutes short term vs. long term? Generally speaking, an investment time frame of more than five years is considered long term. Why is it better to go long term? We know that the stock market is extremely volatile; meaning, it can be up one day and down the next.
But history has shown that over an extended period of time the trend is almost always upward.
An investment period of more than five years provides ample time for the market to bounce back from a more prolonged downtime. So if you think you’ll be needing the money in less than five years, it’s a bit too risky to invest it.
F. Diversify your investment
You probably heard it many times over that you should diversify. Diversification is the practice of spreading your investment around different types of securities or assets to minimize the risk and volatility of your portfolio over time.
In other words, you should “not put all your eggs in one basket.”
Why should you invest?
Investing can help you save for retirement, college tuition, starting a business, and any other financial goals you might have. Investing is one of the most powerful tools people have in their financial arsenal, yet most people keep putting it off.
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Not investing means your money is not working and earning interest and your wealth is not growing. On the contrary, the current value of your money is being eaten away at by inflation. This means that the money you have now in the bank won’t be worth as much in a year’s time.
I have been in the workforce for more than 20 years and my biggest regret so far is not investing at the time that I started working and was earning a regular income. My only excuse is that I had no idea about investing back then. What about you, what’s your excuse today for not investing? What’s holding you back?
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Great article Alice! Very insightful information. Thank you for reminding us to invest in knowledge before investing our money. It’s often tempting to outsource the knowledge portion of investing by selecting someone to manage our money for us, and then we’re hit with higher fees than if we were to learn a little bit more prior to investing for ourselves.
Hello Jillian,
Before parting ways with our hard-earned money we need to know that we’re really putting it to work and not just throwing it away. You’re right, having someone to professionally manage our portfolio requires us to pay some fees that’s why I recommend we invest in knowledge first and learn as much as we can before starting. However, we don’t have to know everything down to the smallest details before starting to invest.
I hope more people who are earning a regular income will consider investing even a small percentage of their money each month. Our investments will come in handy not only during retirement but also when our finances become tight.
Thanks for your comment!
I agree. I regret that I did not start sooner. But no matter, I am doing it now. Can’t worry about the past. Start now and keep going. I have some things to pay off but I have a set amount that I invest each month. Keep up with the great information about personal investing. I will be reading. Have a great day!
Leslie
Hi Leslie,
You’re right, we can’t worry about the past. The important thing is that we are determined to start and keep going. I believe that it’s never too late to start investing. A little amount invested each month will be worth a lot more in the future.
Thanks for dropping by!
Thank you for writing this, it was just what I was needing to read at this point in my life. I have been wondering how to take my finances to the next level and test steps were a great guide! Keep the articles coming – they are very inspiring.
Hello Johan,
I’m glad to be of help in any way. I really wish I’ve known about this when I just started working. But like what they say, better late than never. This is why I would like to get this information out there to as many people as possible so they can start investing and building their wealth.
Thank you for your insightful post about investing. I have a 401(k) plan, but am carrying more debt than I am comfortable with. My plan is to pay off the smallest amount first, then go for the next bigger, and finally, work on paying off the biggest debt.
My excuse for not investing all my working years is that I always only had enough to pay the bills. But I am now investing in training to build an online business with Wealthy Affiliate. Time is money, and I’m investing my time to learn their step-by-step lessons on how to monetize my websites.
Paying off debts should come first before one could even consider investing in stocks or mutual funds. Like what most financial advisers always say, “Pay yourself first.”
I’ve been discussing mutual funds and UITFs with my colleagues. One does not need a large amount of money to invest as many brokers and fund companies have now lowered the minimum investment amount so that even ordinary employees can participate. The problem, however, is that no matter how minimal the required amount is, most families who are living from paycheck-to-paycheck only have enough to support their needs. What could they possibly invest if they’re barely making ends meet?
Starting an online business is a great idea. And with Wealthy Affiliate, anyone should be able to learn online and affiliate marketing. I wish you success Debra in your new business venture.
This is solid advice. I started investing in a savings account with automatic monthly investments. It grew as I forgot about it and when I fell on hard times, it was there for me when I needed it. I think when it comes to investing, procrastination is a big pitfall for me. Do you have any good advice on getting over procrastination?
Hi Melinda,
Automatic monthly investments is a great idea; more people should consider doing this. Some companies now in the Philippines, especially banks, are encouraging their employees to invest monthly and the money is automatically deducted from their salary. Investments will come in handy during tough financial times.
Procrastination is something we all fall into repeatedly; from the very tiny things to the more important things such as investing. And amazingly, we never run out of excuses. I believe that one effective way to beat this is by writing definitive goals, setting a deadline and sticking to it. Write it in bold letters and post it where you see it every waking moment. And when you accomplished that goal, reward yourself.