How to invest your money – the essential guide to profitable investing
Who among us does not seek financial prosperity or freedom from money-related worries or greater control over our financial future? Many of us know that investing is the only way towards achieving the above goals but we do not know how to invest our money. Some of us may have a general idea of investing but may not know the answer to more specific questions. How much money do I need to start investing, how to invest small amounts of money, how to start investing, what to invest in – these and many similar questions confront and confound many of us. In this brief article, we will quickly and simply answer these and other questions that may be holding you back from taking control over your financial future. Thus, this article will tell you all that you need to know about how to begin investing.
How to start investing money
Investment is the critical tool that gives us power over our financial future and enables us to achieve freedom from our financial responsibilities and liabilities. Thus, it is of the utmost importance that we should learn how to get started with investing at the earliest possible. Let us therefore look at the following essential 5-step guide that will answer your most important question – how do I start investing.
Step 1: Analyse your income – expense ratio.
As the saying goes, to know the world, first know thyself. This is the first and most important step in the process of investment. Before you do anything else, you need to understand your income and expenses. This will enable you to identify how much money you can invest. It will also enable you to identify the frequency of your investment – do you wish to add some investment every week or every month or every quarter or every year?
Similarly, it may help you understand the duration for which you want to invest your money – you may be looking for short term investments or medium term or longer term investments. In case you foresee large expenses in the near future, short term investments may be the best bet for you. If you do not have such large expenses in the near future and are interested in higher returns, then longer term investments would be the best bet for you.
While analysing your income and expenses, also try to identify whether you can reduce your expenses. For example, if you have high-interest debt (such as credit card debt), it might be best for you to first pay off such debt before you start investing. Always try to reduce your liabilities as much as possible. Over time, even small liabilities can prove to be a big drain on your finances.
Step 2: Set your investment goals
Proper planning is the key to success – nowhere is this adage truer than in the world of investing. Without proper planning, you may end up losing out on potential returns and may not be able to get the maximum return on your investment. Also, you may end up changing your investment portfolio too often – this may cost you a lot in transaction fees (besides leading to loss of returns). Hence, it is extremely important that you clearly spell out your investment goals.
Do note that different investors may have very different goals – one investor may be looking to have enough money after 3 to 5 years to be able to afford a higher education degree without needing student loans, another may be looking to buy a house after 10 years while yet another investor may be looking to get a large sum of money 20 years later at the time of his/her retirement. As you can see, these three people have investment time frames of 3 to 5 years, 10 years and 20 years respectively. Thus, the correct investment strategy (and ideal investment portfolio) for each of these three people will be very different from that of the other two investors.
Step 3: Identify the type of investments that attract you.
Different investment categories carry different amounts of risk and offer different rates of return. For example, a savings account in a bank may carry little risk and may offer low rates of return. Government bonds may be very secure (low risk) and may similarly offer low returns. On the other hand, investing in the stock market or in real estate carries higher risk and also offers higher potential returns. In general, investment types with lower risk offer low returns while those that carry higher risk offer higher returns. Hence, you need to identify whether you are more interested in safe investments or in higher returns.
A simple rule here is that younger people can typically afford to take greater risk (and thereby open up the possibility of getting higher returns). Older people (for example, people close to the age of retirement) may not be able to bear higher risk – if their investment fails (makes a loss), then they may be left without their only source of income.
One preferred approach is to opt for a mix of different investment types – a diversified investment portfolio. The advantage of such a portfolio is that it ensures that some of your investment is relatively secure while the rest of your investment can potentially yield higher returns. In case you have a higher risk appetite, you may go for a mix where you put between 75% to 100% of your funds in the stock market (and the rest in safer instruments like savings accounts, bonds, etc.). If you are looking for low risk, you may invest just 10% to 20% of your funds in shares and may invest the rest in safer investment types. A balanced portfolio may involve putting 50% of your funds in shares and the rest in safer instruments. Such a portfolio offers a good balance of security as well as high returns.
Do note that identifying your ideal investment portfolio will also enable you to identify how much money you need to start your investment. For example, you may be able to open a normal savings account with a relatively small sum of money. On the other hand, investing in shares or in real estate may require larger sums of money.
Step 4: Decide whether you wish to use professional support.
An old African proverb says, “if you want to go fast, go alone; if you want to go far, go together”. In the world of investment, typically you will need professional support if you have a larger and more diversified portfolio. A personal financial planner or wealth manager will not only keep track of your investments but will also inform you about new opportunities. This will ensure that you get the maximum returns on your investment and do not miss out on any potential opportunities.
In case you have a smaller portfolio with less diversification (for example, if you only invest in savings bank accounts and a few bonds), you may not really need a personal wealth manager. You may be able to track and manage your investments accurately all by yourself in this case.
Step 5: Always keep reviewing your investments.
Once you are done with the above steps, you are ready to actually make your investments. But do remember that your work does not end there. There is no shortcut to regular effort. You need to review your investments regularly in order to verify that they are indeed performing to their potential and meeting your expectations. In case they are under-performing, immediately try to identify the source (root cause) of this and take the necessary corrective action. At times, you may even need to make some significant changes to your portfolio.
Also ensure that you are well aware of any new investment opportunities available. Even if you invest only in savings accounts, you may come across some excellent opportunities. For example, from time to time different banks offer higher rates of return on savings accounts in order to drum up deposits. Similarly, some government bonds may carry higher rates of return. Be on the lookout for such opportunities always in order to get the maximum out of your investment.
Now you have learnt how to start investing and are ready to enter the world of investment. Follow the instructions given above sincerely and success will be yours. The world of investment may appear intimidating at first sight but if you follow the instructions above, you will easily be able to make your money work for you.