Is investing something that only rich people do?
Is there a magic lower limit above which you’re allowed to invest and earn more in return?
It’s probably a very boring subject, that’s why nobody is excited about it. When I talk to my friends about investments, they’re all “spend your money now that you can”, or “I don’t trust anyone with my money”. Understandably so, how can you get intrigued when you save money on the side that you can use 10 years later?? Suddenly, when I talk about how my investments paid for today’s expensive dinner out, everyone tunes in.
I read many books on finance and economy, had discussions with a lot of people, and followed famous investors such as Warren Buffet.
What I’ve found is that the majority of the middle class either
a) Never invests
b) Invests very little through their employer’s pension
c) Invests only by buying their own home (mortgage)
Why is it important to invest?
“Your money can work harder than you can”
You may have heard of inflation. The simplest explanation is that everything becomes a little bit more expensive every year.
Because of increasing prices, your purchasing power becomes weaker. This means that £100 today will not buy the same amount of goods in 10 years time.
Inflation varies and depends on many economic factors, but it usually calculated at 2% every year. Now 2% may sound low, but if you add up all the years it is definitely eroding our idle cash.
So keeping cash in the bank or under the mattress works against us, not for us.
Even if inflation would be 0, it is still wise to invest. If you want to earn passive income and be financially independent at some point you should make your little green employees work for you!
I was very much convinced after reading the all-time classic Rich Dad Poor Dad book. It explains in detail why you should allocate spare money in buying assets (property, shares, bonds) and not in things that lose their value over time (car). Another one I liked from Robert Kiyosaki is the Rich Dad's Cashflow Quadrant.
Investment always comes with risk. I was always afraid of losing my hard-earned cash. The last thing I want is to earn back less than I invested! And this is why learning more about the subject is definitely a journey worth its time.
What if I lose money?
It’s all about the RRs.
Reward comes with Risk. The higher the risk, the higher the reward. For example, If you leave £10,000 in your bank account you will get back around £50 per year. But your money is very safe since it’s very unlikely your bank will go bankrupt, plus if that happens, a financial services compensation scheme will return all your money back. Very low-risk -> very low reward.
Now if you put your £10,000 in buying a property and renting it out, you will probably get a much higher reward but with a higher risk. It’s definitely possible to earn £500-1000 per year or even higher but what if the tenants don’t pay the rent? Or the boiler breaks? Or the property sits vacant?
It is not uncommon to lose money in the process, in order to earn a lot more later. This is part of the process and the favorite part of news media too!
No media agency sold a paper titled “6% returns in the past 10 years of investment achieved!”. Instead, a “Stock market crash! Millions lost in one hour!” perfectly does the job. Regardless of the fact that it’s only temporary, and we all know the stock market will go up higher than the previous levels again.
Investments don’t always go up and losing money can happen before they go up higher again. This is why finding the right balance for your goals is the best thing to do. Which brings us to the next chapter.
Define your goals
Start with the end in mind.
Setting goals for your investment is one of the most crucial tasks. Every investment journey should start with the end in mind.
Why do you want to invest? For some, an expensive wedding is coming up in 5 years, or they want to buy a new car. Others may want to save for their newborn’s college education in 20 years. For me, I want my investments to fund my family’s living costs in 10 years+.
Depending on the length of the goal, you should follow different investment strategies.
Generally speaking, you should not consider investing if your goal is set to be less than 5 years from now. You’ll probably be better off saving money in a Cash ISA for 1% a year. If this is you, then watch out for my next post (or subscribe and you will definitely get it).
For the rest of us that have a longer goal in mind, investing makes sense.
Setting your goals is important, but so is sticking to them. Keep your goals in mind and do not lose faith. There is no point in setting a goal and abandoning it in 2 years only because your investment gains were not as high as your friend’s. This is a post on its own, and I will write more about it later.
For many people investing comes automatically with their employer’s pension. But how much is that? What if I don’t contribute to my pension? Will a 10% contribution be enough to cover my living expenses when I’m 65? All this was too abstract to me. I won’t hide that I started digging out of fear!
I always liked Paul Arden’s quote: “Without having a goal, it’s difficult to score”
Final thoughts on investing
Investing should be considered as a long-term gain. Setting goals and not fearing about temporary bumps is part of the process. Nobody can predict the future but taking risks that can be measured will give better results than keeping the cash in the bank.
In the next post, I will write everything I know about how to invest your money. How to minimize your risk and maximize your reward. Including different tax-efficient schemes I take advantage of.
You may have heard the phrase “Don’t put all your eggs in one basket” or “Do not invest in junk bonds”. Not everyone should have the same strategy as mine but some general principles apply.
Are you thinking about investing or have you already started? Which phase are you in? Please let me know in the comments. This is what I love the most!
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