Having some cash aside is never a bad idea. It makes sure you can pay the bills and maybe cover some unexpected costs. Having a lot of cash, however, might not be such a good idea. Interest rates have become so low that they don’t cover the cost of inflation anymore.
Inflation is when you pay fifteen dollars for the ten-dollar haircut you used to get for five dollars when you had hair. ~ Sam ewing
Let’s find out why investing is the best option and how to do it.
Why you should consider investing
Inflation is the decrease in buying power your money has. If you today can buy ice cream for let’s say 2 dollars, within a few years you would have to pay 3 dollars to get that same icecream.
This means if you hold money in a savings account that pays an interest rate lower than the annual inflation rate, you are losing money in your savings account.
Saving vs investing
Let us first look at the differences between investing and saving. Both have their upsides and downsides.
- No risk
- Low entry level
- Very liquid (you can withdraw money easily and fast)
- Low returns
- Value reduction due to inflation
- High returns
- Protected against inflation
- Dividend income
- Higher barriers to start
- Higher risk
Having considered both the upsides and downsides with investing and saving, I believe it’s best to have a combination of the two. Money that you might need in the short-term (< 5 Years) should better be held in a high-interest savings account. Whereas money you can go without for longer than 5 years can be invested.
How to start investing
1. Learn how the stock market works
Before you start investing, it’s important to understand how the stock market works. Whether you decide to invest in stocks, bonds, obligations or index funds, make sure you understand what you are putting your money in.
This might help you to get a good understanding of how the stock market works: This is how you get high returns in the stock market
” Risk comes from not knowing what you are doing. ” ~ Warren Buffett
2. Know the costs involved with investing
Investing can come with some additional costs. Make sure you know what those costs involved are and how you can avoid some of them. Fees, taxes, and foreign currency exchange costs can eat up your returns if you are not careful.
The taxes you pay depend on the types of investment you choose and/or the country or state you live in. Fee’s and currency exchange costs usually differ between brokers.
3. Find your broker
Before you can start investing you need to find a broker. To buy and sell orders for stocks and other securities a broker is necessary. There are many brokers to choose from with many differences in services and costs.
Differences between brokers include:
- Currency exchanges costs
- Platform (user experience, like a good app, etc…)
- Range of products
- Research tools
- Tax filings (some brokers make it easier to file your taxes)
- Deposits and withdrawals (how easy you can deposit or withdraw money)
- Stock transfers (how easy you can transfer stocks or other securities to or from another broker and the costs involved)
If you need some help with choosing your broker, for US brokers, this might be a good source to help: BrokerChooser.
4. Find your strategy
When you have decided to start investing, you will need a strategy. Some people want to be active and spend time learning the ins and outs of investing. Other people want to reduce risk and spend no time at all on their finances. For both, active and passive investors there are suitable strategies to choose from.
For people who want to reduce risk and spend as little time as possible investing, I recommend reading this: Successful with passive investing.
For people wanting to learn everything about investing, I recommend learning about value investing. Therefore consider this book: The Intelligent Investor ~ Benjamin Graham.
” Strategy is a pattern in a stream of decisions. ” ~ Henry Mintzberg
5. Build your portfolio
When you are ready to start investing, you need to start building your portfolio. This means choosing what stocks, bonds, real estate, etc… you are going to invest in.
To find the stocks you are looking for, you could decide to use a stock screener. This will allow you to filter out companies that have specific traits you are looking for.
This might help in your search: How to find undervalued stocks.
When you have found the specific stocks you were looking for, you can compare them to each other or consider doing an in-depth analysis. For that, a company’s financial reports would come in handy.
6. Maintain your portfolio
When you have built your portfolio, it’s important to keep tracking its performance. You could, for example, decide to sell your under-performing stocks or buy additional stocks of your best-performing ones.
When owning individual stocks, it’s a good practice to keep tracking the businesses you have invested in. Read their Quarterly reports and stay up to date with how their industry is developing.
Holding cash in a savings account is good for paying short-term obligations and as a safety buffer. Investing is useful to grow your wealth and should only be done with additional money and for the long-term.
Investing can be done successfully by everyone. With the arrival of online brokers, investing is now cheaper than ever. There are strategies for everyone. Low risk, high risk, time-intensive and passive.
The path you choose is up to you.
” It is not necessary to do extraordinary things to get extraordinary results. ” ~ Warren Buffett
If you decide to start investing and you are dedicated to learning everything about investing and assessing companies, consider reading these articles as well:
- How to find undervalued stocks
- This is how you get high returns in the stock market
- Successful with passive investing
- Quarterly reports: how to read
- The cash flow statement: how to read
- The income statement: how to read
- The balance sheet: How to read
- Investing in real estate with less than $1.000
*DISCLAIMER: The content on this website is made in good faith and I believe it’s accurate. However, this content should be considered informational and not for making financial decisions.