This post is for all my beginners on how to invest money.
There you are – kind of interested in investing, have a bit of extra income but not sure how to actually do it. Or even what your options are. There is SO much information out there which can makes things pretty overwhelming!
While I am not a financial planner, I studied finance at university which taught me much of what I know what personal finance today which I will share with you in this article.
Let me break the investment jargon down for you.
What does it mean to invest money? How does it actually work?
Let’s get back to basics.
When you invest money, what you are doing is either buying a part of a company or an asset with the idea that the value of the company/asset will grow over time.
Technically, as investment could be anything. It could be stocks, a painting, gold jewellery, land in the metaverse or even a designer bag.
I mean, an Hermes Birkin bag outperformed stocks and gold for the last 35 years.
How much money can I make with investing?
Unfortunately, investing will usually not make you a millionaire overnight. It is not a get-rich-quick scheme.
I would think of it more as a way to grow your current wealth. That being said, you don’t need a lot of money to get started!
Does that mean I won’t be a millionaire with investing?
You will! Just not overnight. To make substantial gains, you need to invest consistently over decades.
Click here to learn how long it takes to become a millionaire.
It takes time to make money.
I know, I know – that sounds like a lot of work. It is – at the start. The first few years of investing are tough. After that, your wealth will start increasing significantly due to compound interest and market returns. Let me show you.
Let’s say you have $5,000 right now and decide to invest this, adding $800 a month. You decide to invest in a fund that makes 8% a year. As you can see below, 10 years later it will be worth $157,455. That’s okay, nothing life-changing.
The profit you made is 35% of your portfolio.
Now, let’s say you keep consistently investing for 30 years. Your investment will now be worth $1,246,966.
The profit you made is 76% of your portfolio. This is why long-term investing is so incredibly powerful.
What should I invest in?
You have lots of different options to invest your money, I would highly recommend doing extensive research on each type to see which asset is right for you.
When deciding where you should invest your money, you’ve got plenty of options. These options include the below.
1. The Stock Market
When you buy a stock, you own a small portion of the company you bought the shares in
If you’d like to learn how to actually buy a stock in Australia – I’ve made a FREE detailed guide on how to do this which you can view by clicking here.
There are two ways to make profit in the stock market – capital gains and dividends.
Dividends: Think of this kind of like bank interest. When the company makes a profit, they may pay you a portion of this in dividends. How much you receive will be based on the stock, market and number of units you own. This is a great strategy if you are interested in having an extra income stream.
Capital gains: When the value of the company grows over time, the price of their shares go up as well. These shares can then be sold to make a profit. For example, let’s look at my favourite stock – A2 milk. If you purchased $5,000 worth of shares in April 2015 and sold today, it would be worth $137,053 even with the current market drops.
2. ETF (Exchange Traded Fund) & Mutual Funds
If you want to buy multiple stocks in one go, you can opt for an ETF (Exchange Traded Fund) or a Mutual Fund.
The key benefit of doing this instead of buying individual stocks would be diversification which would significantly lower market volatility and risk.
ETF (Exchange Traded Fund): Exchange traded funds (ETFs) is a way to get a return similar to an index or a commodity. These funds provide excellent diversification. You can buy and sell units in ETFs through a stockbroker, the same way you buy and sell shares. Click here to learn how to buy at ETF.
Mutual Fund: Mutual funds are similar to ETFs, however they are managed by professionals. Rather than following an index like an ETF, they pick and choose stocks that they believe will perform well. Keep in mind that mutual funds will often have high management fees so make sure to pay attention to that prior to making your purchase.
If you’re interested in buying shares in an ETF or a Mutual Fund, you can use my guide on how to buy a share. It’s the same process!
3. Investment Bonds
When you buy something called a “bond”, you are lending your money to either the government or a company. The government/company selling the bond will then pay you interest on the loan for as long as you hold the bond.
If you’re an investor that wants a very low risk investment, bonds would be the way to go. That being said, low risk also comes with low returns. I personally hold a very small percentage of bonds in my portfolio as I am comfortable with more risk.
If you’re Australian, you can learn more about Australian Government Bonds by clicking here.
4. Savings Accounts
The least risky way to invest your money is to put it in a savings account and allow it to collect interest. However, as mentioned before, low risk means low returns. The risk when putting your money into a savings account is minuscule, but this also translates to your returns.
That being said, ensure that your savings account is giving you an interest rate that is beating inflation so your wealth does not deteriorate.
If you’d like to learn more about inflation and the impact it has on your savings, I’ve written a detailed article on this topic – click here.
5. Physical Commodities
Physical commodities are investments that you physically own, such as gold, silver, paintings, collectible items etc. These items may go up and value and can be resold at a later date to make a profit.
Investing in precious metals is fun as you can see, touch and even wear your investment. It also offers some extra diversification to a portfolio.
If you are interested in investing in gold, I recommend checking out my article on it by clicking here.
Of course, there are many more investments out there such as real estate, foreign exchange currency trading, options etc, however these 5 types should help get you started.
And, that’s it! I hope this will give you some idea of how you can actually invest your money. As always, feel free to send any questions through to email@example.com.