(This is a basic guide to start investing in the stock market. We will not discuss numbers and calculations here yet. It will be discussed in a future post.)
It’s an exciting thought when you finally have the savings to start investing. Along with that excitement comes confusion on when, where and how to start. There are tons of resources and these give the same or sometimes conflicting advice. The fact is that every individual is unique and therefore the investing style should differ for everyone. There will always be those who like high risk, high reward choices while others prefer the opposite low ris, low reward option.
For the ones who are just starting out, we’ve got you covered.
We’ve written about the basics of wealth-building on a previous article. For starters, we do not advise day-trading or trading stocks on a day to day basis. That is an extreme form of high risk, high reward strategy and is not advisable for beginners. Although some may argue that a few people were lucky enough to get rich real quick. Most of us aren’t that lucky. It’s okay to get wealthy later in your life as long as you follow a long-term plan for financial freedom. This guide is a long-term surefire way to make you rich.
Now we’ll start to delve into more details on how to start your path to building an empire.
First things first,
PAYOFF DEBT
You will always be at the mercy of your creditors if you keep on piling debt. You might ask “Which debt should I pay first?” The rule of thumb is to pay off the debt with the highest interest. Now, this can be modified to paying off your smallest debt first and then work your way up. “Why would someone do that?” Some people like celebrating small wins first in order to get motivated. Think of it as a reward in itself. Thinning your number of creditors might be a motivating factor. Again, every individual is different so you’re going to have to adjust your strategy according to what makes you happy.
Create an Emergency Fund
The norm is to save at least 6 months’ worth of salary before investing. This is a pretty good buffer for emergencies and/or a freak event like losing your job. Always plan for emergencies!
Start Planning
Make sure your personal finances are good. Investing has its own risks. The rule of thumb is to invest money you can afford to lose.
Plan your Budget
A lot of this comes from properly managing your finances. How much are you earning? How is your spending? How much can you realistically save? How much can you realistically invest? Some follow a 70-20-10 rule or 70% of your income goes to expenses, 20% on savings, and 10% on tithes. You can modify this rule to better match your current situation. Try to lessen expenses and add them to your savings instead.
Set an Investing Goal
Once you have the two requirements, it’s time to think about what you want to achieve. Do you plan on retiring early? Or do you simply want to start investing? A one-year plan is good enough for starters but as you get your stash bigger, you should start planning on a more concrete and definitive goal. Say, I will invest 10-20% of my income for 2021. This way, your mindset would be to set aside the 10-20% money into your investments.
You Can Diversify Even if You’re Just Starting Out
Warren Buffett, one of the most successful investors of all time advocates using this technique. Tony Robbins recommends this technique to eliminate the headache of individually picking stocks. Both financial giants advice on investing in Index Funds. Investing in index funds is one of the safest ways to grow your money. To borrow the definition from Investopedia, “An index fund is a type of mutual fund or exchange-traded fund (ETF) with a portfolio constructed to match or track the components of a financial market index, such as the Standard & Poor’s 500 Index (S&P 500). An index mutual fund is said to provide broad market exposure, low operating expenses, and low portfolio turnover. These funds follow their benchmark index regardless of the state of the markets.”
Invest in Your Self
Investing is not just about setting aside money and letting it grow and work for you. You should also invest in yourself. Study about entrepreneurship and money. Read at least 1-2 books monthly. For starters, for this month we would recommend: Think and Grow Rich by Napoleon Hill and The Richest Man in Babylon by George S. Clason.
Build your financial knowledge. Understand the fundamentals of finance. Read and hang out with individuals who have businesses. As the saying goes “You are the people you surround yourself with.” Network with like-minded people. Stop asking how to get a Lamborghini to a person who owns a Toyota.
Once you know enough then you can start stock picking
It is a far more rewarding experience to pick the stocks if you know what you’re doing. They say that only 10% of stock pickers outperform index funds such as the S&P 500. So be careful. If you aren’t too keen on picking the stocks yourself, then you should focus investing in index funds.
And then What?
Remember that this is a long-term strategy and it won’t make you rich in 1 year. The performance of your investments will depend on the economy and the amount you’ve invested. The more you put it, the higher your returns (or losses).
That makes us repeat another advice, never put all your eggs in one basket. Once you have a sizable amount invested in the stock market, then maybe it’s time to to put some of your money in other investment instruments. Maybe it’s time for your to invest in your own business. Almost everyone wants to have their own business at a certain point in their lives. But, again, this is topic for another post.