Disclaimer: This information is made available for educational purposes. It provides general information and is not intended to provide financial advice. This information should not be used as a substitute for competent advice from a licensed expert.
Investing allows you to sit back and watch your money grow for you. Investing is the necessary vehicle to reach financial freedom.
Thanks to inflation, cash stored in basic savings accounts loses value over time. This means that $5000 today will only be able to purchase less than $5000 worth of stuff in the future. However, investing can help combat inflation.
There are tons of investment types. Some basics include stocks, bonds, and mutual funds. Real estate, businesses, collectibles, precious metals, cryptocurrencies, are a few other alternative investments. Each of these securities comes with a different risk level and potential return (or loss).
With greater risk comes greater potential returns.
You’ll want to build your investment portfolio in a way that matches your personal values, risk-tolerance, and expertise. It’s important to be intentional with your investments and never invest more than you can afford to lose!
Start early
The sooner you start investing, the more time compound interest has to work its magic! Every $1000 invested today with a 10% average annual return amounts to…
- $1100 next year
- $2,593 in 10 years
- $28,102 in 35 years.
Diversify:
Reduce risk by investing in a variety of securities. This way, any losses can be offset by gains in other places. Investing in index funds (such as the S&P 500) provides instant diversification, and that’s why these securities are popular for both beginner and experienced investors. Also consider other…
- Mutual Funds professionally-managed pool of money from many investors. The money is put into investments such as stocks, bonds, and short-term debt.
- Exchange Traded Funds: a bundle of many investments that is traded like a stock. ETFs are similar to mutual funds but can be bought and sold throughout the day. ETFs may track performance of an index or follow a certain industry.
Buy low and sell high:
There are two main ways to earn money from your investments…
- Capital gains: you sell at a higher price than you bought at
- Cash flow over time (such as dividends from stocks)
You make more money when you by low and sell high!
The Rule of 72
Divide 72 by your % annual interest rate. That’s how long it will take for your money to double.
The rate of return on a savings account is often less than 0.05%. That means, it would take your savings over 144 years to double. Oof.
However, investments provide much better potential to double.
As discussed, many people put their money into the stock market through index funds. These investments historically average 8-10% growth each year. Using these numbers, your money would double in less than 9 years!
The 4% Rule
In retirement, you can draw down a percentage of your retirement account without depleting the money in your account. This works because compound interest keeps the rest of your funds growing.
The safe percentage varies because inflation and return rates change each year. However, drawing down 2-4% can help your portfolio last a long time.
Thanks to this rule, you can calculate how much you’ll want in your account before retiring. Choose your desired amount to live on and divide by the percentage you’ll draw down.
Ex: with 4% drawdown. To live on $100,000 per year… you’ll want $2,500,000 to retire.
Once you get your portfolio to your desired amount, you won’t need to work to sustain your lifestyle!
Where to invest?
Investing is actually super easy, and it only takes a few minutes to start.
Today, there are many apps that allow you to make trades straight from your phone or computer. You’ll want to choose a platform that matches your investment needs and speaks to you.
Here are a few of our favorite places to start investing in the stock market…
- E*TRADE: a highly trusted option I’ve personally been using for years
- Robinhood: popular app with an easy-to-use interface, pioneered commission-free trading
- Scout: investment app designed for athletes. You can choose professionally managed funds that align with your passions, and it’s super easy to understand. Scout also offers round-up investing.
Summary
Start early, diversify, and try to take the emotion out of investing. This information is a super high-level view at investing for beginners. Please contact a financial advisor for personal recommendations!
Read more: the ultimate guide for NIL finances
