How do we start investing? It can be intimidating and scary and it’s no easy task to get beyond the indecision and fear. To keep it simple, I’ll share what I wish I knew when I first started investing. First, I needed to understand what investing actually is. Second, I needed a clear goal. Finally, I needed a personal investment plan to serve as a roadmap.
What is Investing
Investment is the accumulation of assets while minimizing liabilities. That’s easy enough, when we consider simple definitions. An asset is something that generates income or grows in value while a liability can be defined as something responsible for on-going expense.
I like to think about cars as an example, because we all start out thinking of them as assets. Accountants would call them depreciating assets because they continuously lose value over time, but retain some re-sell value. However, a vehicle is responsible for on-going expenses like fuel, maintenance, insurance, and, if the vehicle was financed, interest. Because it does not generate income or appreciate in value, it is not an investment asset. Given the expense associated with owning the vehicle, it is more appropriately classified as a liability.
”Know what you own, and know why you own it.” – Peter Lynch
These are simple definitions, but they will help when you first get started. Moving forward, you find that many assets involve some degree of maintenance expense and you start to realise assets can also be liabilities. For us as investors, we learn to identify how any new asset will affect our total liabilities and use this information in our purchase decisions.
We all have different dreams and goals, but the common factor we all share is the need for money in the future. Because working forever is not practical or appealing, and hitting the lottery is unlikely, investment is important throughout our working lives to ensure we maintain a comfortable lifestyle when we choose to exit the workforce.
Getting started can be as easy as putting money aside in a savings account; however, it is not sufficient for long-term investment alone. After a visit to the grocery story, have you ever thought, “wow, that’s a lot more expensive than it used to be…”? Even when our lifestyle and habits stay the same, our expenses will increase. This is because of inflation. Dollars today are worth more than dollars tomorrow. Our money needs to grow over time to retain its value.
Get Started With Your Plan
“Financial peace isn’t the acquisition of stuff. It’s learning to live on less than you make, so you can give money back and have money to invest. You can’t win until you do this.” – Dave Ramsey
I found the best way to start investing was to make a plan and stick with it. A good investment plan starts with a review of the budget. Any plan needs to work on paper first and looking at the numbers can really help motivate you to commit.
Starting with the budget also helps to tackle your emotions. Especially if you feel like you have nothing at the end of the month to invest. This is such a common thought and it will stop you in your tracks. To get beyond it, I found it helpful to think about it differently. I started by applying the principle of paying myself first. Within my budget, I moved 10% of my income immediately for my investment plan. What was left over was all I had to meet my expenses. If I found I couldn’t meet those expenses, I knew I was living beyond my means and needed to find a way to cut down my spending.
Now that you can see there really is money available to start investing, because you have made it a priority, it’s time to think about where that money should go. If this is all very new for you, deciding where to invest your money is not easy. There are plenty of options out there. You can look at growth assets like buying stocks in the share markets, or fixed income assets like government and corporate bonds. You can invest in managed funds like exchange traded funds or mutual funds. You might consider the real estate market and alternative investment classes as well.
I would suggest you take your time to really think it through. Remember, you are investing for the future. Adopt a long-term mentality and approach this decision calmly. While you develop your investment plan, consider some low risk options to hold your money at a higher interest rate. This way, your money is growing while you take the time to develop your knowledge, research investment options, or seek out professional advice.
I used High Interest Savings Accounts in the beginning as an excellent option to preserve money that could be used for investment. Risks are considered low, but you do want to be sure to choose a bank or credit union with a government guarantee on savings.
I have also used Certificates of Deposit (CDs), also known as term deposits, as they are good for higher interest rates while being considered low risk. A CD is an agreement with the bank that you will not withdraw a certain amount of funds for a specific period of time and receive a higher interest rate in return for this assurance. Often, the longer the duration and the greater the sum, the higher the interest rate. This can be quite good if you want to be certain that you will not touch the money for a specific period of time; however, can also limit you from using the funds for other investments until that time period has lapsed.
Starting off with your investment plan is an exciting time. Dreaming about where you want to be is one thing, but seeing a practical plan to get you there is so empowering. If you take nothing else away, understand the value of committing your dreams to tangible plans on paper as the best investment of time and energy.