Investing: Understanding the Basics
Hey friends! If you’ve been reading my blog for some time now, you know that I’ve spent the last year and a half focusing on eliminating my debt. Feel free to read all about where why I decided to get serious and pay off my debt here. Well, I’m happy to share that I’m almost there! Whew, hallelujah! It’s been a journey and honestly, I’m going to have so much extra money lying around. Now, the old me would hop on the chance to shop and blow all the extra money on frivolous things. However, the new and financially mature me is ready to start investing. The world of investing can be pretty damn intimidating if I’m being honest! But it doesn’t have to be. In this post, I’d like to share with you the basics of investing.
What is Investing?
By definition, investing is the practice of spending or expending money with the expectation of realizing a profit or generating an income at a future date. The underlying goal of investing is to make your money work for you now so that you can reap the benefits over time.
Why Investing Important for Your Future
Investing is so important for your future for many reasons. First things first, investing is the one thing that can help you build wealth. Next, investing can help you reach your long-term goals quicker like the ability to retire early and/or more comfortably. Finally, money is power and investing helps you bring in the dough!
Investing is Not the Same as Saving
It’s important to note that saving and investing, although both great ways to build wealth, are not the same thing. Saving is the act of setting money to the side to cover emergencies or future expenses. With savings, there’s pretty much zero risk and a lower return. Why? Because of inflation. Inflation diminishes the value of your money sitting in a savings account day by day. Yes, you may have saved $20,000 and in ten years you’ll be able to take that $20,000 out of the bank. But it’s value has decreased because of inflation, meaning you’ve lost money. Investing, on the other hand, allows you to grow your money and stay ahead of the effects of inflation.
You can read my post about saving here.
This is all pretty simple, right?
Things to Consider Before You Start Investing
Before you start investing, there are two things that you should take into consideration first:
Credit Card Debt
If you have a lot of credit card debt (like I did) you should hold off on investing and pay down your debt first. This is mainly because you’ll end up paying more the longer you keep that balance open.
Your Emergency Savings Fund
When you invest, you should be prepared to leave that money in your investment for at least 3-5 years. Unfortunately, there are times when unexpected things happen and you’ll need money in a pinch. This is what an emergency savings account should help with, not your investments. A good rule of thumb is to have 3 months of your living expenses saved. But I’d say a real ideal amount is 6 months.
The only way to build your emergency savings and eliminate debt is to have a solid budget in place. Try my free budget download to get started!
Key Tip to Understand About Investing
Investing is all about risk and reward. In comparison to saving, investing is higher risk, but higher reward. One way to mitigate this is to diversify.
Diversification allows you to minimize your risk and maximize your rewards.
Types of Investments
Stocks are a type of security in which stockholders purchase to share ownership in a company. When you purchase stocks, you’re essentially purchasing a small piece of a company.
Bonds are units of corporate debt issued by companies and securitized as tradeable assets. When you invest in a bond, you essentially loan a corporation or government branch, money to fund projects or operations. Basically, bonds are an IOU with interest. With bonds, the principal amount that was loaned out must be paid back in full by the debtors by the maturity date.
Mutual Funds occur when you pool your money together with other investors to purchase shares of stocks, bonds, and other securities. The key thing to remember is that mutual funds are investment portfolios that are professionally managed by a third party.
Real Estate is property (land, buildings, natural resources). It is a tangible or real asset. There are three types of real estate: residential, commercial and industrial.
There are many other types of investing, but I just wanted to keep things basic here and not bombard you with information! Honestly, guys, investing isn’t as scary as it seems. It just takes some time, a little tolerance for risk, a desire to build wealth, and educating yourself!
Check out these books that further explain the world of investing:
In conclusion, the hardest part about investing it seems is simply getting started. Especially for women! If we want to catch up to our male counterparts as far as wealth is concerned, we have to start investing. Seriously, you can invest with as little as $100. I’m certain that you’ve spent and wasted $100 on way worse. Why not invest in your future?