Topic
FR What are the basics of investing?
Last Updated:
Should I even bother learning how to invest? Isn’t investing just for the super rich? I don’t understand why people are so obsessed with investing, I mean what does that even actually mean, how does it work?
If you’ve ever had these thoughts before, you are not alone. Everyone needs to start their financial education journey somewhere and luckily you’ve found the right place. But first, let’s try to break down the basics and go over some of the concepts and language before we get you started
What is investing?
In a nutshell, investing is the act of trying to put your existing money to work today to make more money in the future. When you invest your money, you essentially own a piece of whatever you buy. When you invest, you are buying with the hope that its value will increase over time and provide a positive return (aka generate extra money) for you and your wallet.
In the case of a , you become a part owner of a company, and you’re in it for the good days, and the not so good days. You can make big profits if the company does well, but you can also lose money if the company does poorly.
Why should I invest?
Life is expensive, we all would love a nice car, a house, and to eventually retire in comfort one day. Or you know, live a lavish lifestyle like Drake. But, all of these things require money, and saving by itself isn’t the quickest or most effective way to achieve all these goals. That is where investing comes in.
When it comes to building wealth, investing can be an extremely powerful tool.
Getting started in investing early helps you maximize the time that you can take advantage of compound interest, where you essentially earn interest on interest. Over the course of many years, a relatively small contribution can compound to a very large sum of money. Let’s explore this concept:
Take Yusuf for example, he learned about the importance of investing early and decided to invest $120 every year starting from the age of 25. Assuming a 5% annual return, his contributions will be worth $15,220.77 at the age of 65. He only contributed $4,800 total over this 40 year period, but through the power of compound interest, his money will be worth significantly more than that.
Now let’s look at Yusuf’s friend Shelly, she invested the same $120 every year with the same 5% rate of return, but she started at the age of 35 instead. Her total sum would be worth $8,371.29 at the age of 65, almost half of what Yusuf has.
Compound interest is a powerful tool to build wealth for yourself, your family and future generations. Overtime it can really change the course of your financial future.
What can I invest in?
When you purchase an investment, it’s typically called an “asset” (Yes, more financial jargon, we apologize!) BUT there are many different assets you can invest in, and some are riskier than others, so it’s important to figure out what is right for you. Before you can make that decision, you need to know what your options are. So, let’s breakdown the basics around what assets you can invest in:
Stocks: Stocks represents a partial ownership in a company. When you purchase shares in companies like Apple, Tesla and Google, you buy a small piece of that company
Bonds: Debt that is issued (usually by a company or government) that the issuer promises to pay back with interest. This is essentially a loan where you are loaning money to the bond issuer. A bond is similar to a loan, where the investor purchasing the bond is lending money to the party selling the bond. The bond seller (usually a company or government) would promise to pay back the borrowed amount after a set time period. They often also pay interest at set intervals over that time period.
Mutual Funds: A collection of stocks, bonds and other investments managed by a professional.
Exchange Traded Fund (ETF): A collection of stocks and other investment instruments that aims to track the performance of an index. Examples include the S&P 500, which tracks the performance of the 500 largest publicly traded companies in the United States.
Crypto: Digital currency that operates on the blockchain. This is a topic that requires some extra reading to understand, so check out this great introductory guide!
Real Estate: Houses, apartments, offices, rental properties, land and anything else you might consider a place to rest your head!
A few other things to know before you get started…
Okay, you’re finally starting to get it. You’re beginning to understand the power of compound interest, and you’re eager to buy your first stock. That’s amazing and we’re proud of you, BUT, there are some things you should try to work through before you hit go on that first investment:
1. Have an emergency fund set up
You can’t put a price on peace of mind, and an emergency fund provides you with the assurance that you can cover an unexpected expense in case of an emergency.
A broken down car, a furnace that decides to stop working and a sudden loss of income are all emergencies where it’s helpful to have quick access to cash to avoid going into, or deepening, your debt.
A good rule of thumb is to build up enough to cover a few months (3-6) of your must-have expenses! But, this can vary based on your personal situation, not everyone will have the financial means to keep an emergency fund on hand with this type of money. You can try to build one slowly over time!
Pay off high interest debt
If you have high interest debt (more than 4%) you should first focus on paying that balance off first. This includes things like your credit card, where interest rates can be higher than 20%.
The reason for this is because high interest debt will cost you more than anything you can reasonably gain from investing. For example, the S&P 500 index, which tracks the performance of the 500 largest companies in the United States has averaged an annual return of around 10% since 1900. Credit card debt with an interest of 20% means you’re losing 10% when you opt to invest instead of paying off your high-interest debt.
Start contributing regularly, and consistently
Once you have an emergency fund set up and your high-interest debt is paid off, congratulations, you are now ready to begin investing!
Another top: Be consistent with it. Pick an amount to contribute to your TFSA and/or RRSP every month, and try your best to be as consistent as you possibly can. Once you have done that, you are well on your way to financial freedom!
Investing is a powerful tool, and trust us, your future self will be happy that you have made the decision to start investing today!
Next Post
