A lot of people are intimidated by the idea of investing. Everyone understands the importance of saving money. Saving money allows people to put money aside in order to use it in the future for one reason or another. Reasons may include saving for a life event (wedding, car, down payment for a house, college tuition each year, etc.) The list goes on.
Investing is different however. It doesn’t really take the place of saving. Instead it goes hand in hand with saving to make someone financially well-balanced. So what is investing and why is it important? In this lesson, you’ll learn:
- The difference between saving and investing
- Types of Investments
- How to Start Investing
- How to Invest Using only a little money
Investing vs. Saving
Simplified, investing is the act of putting money into an endeavor that is designed to either create an income, create a profit, and/or create wealth. Let’s dig a little deeper and I’m sure you’ll see the difference. Below are some of the key differences between Saving and Investing.
- Short Term – Generally this is money that you may want access to right away such as saving for an emergency fund or planning a vacation in the next year or two.
- Easy Access – Money in a savings account or hidden in a shoe box can be obtained within a few minutes.
- Little Risk – If money is stored at home, there is no risk of losing it unless it is illegally stolen from you. If it is in an FDIC insured bank, if the bank were to go out of business, your money is still insured and you will still have access to it.
- Small Interest – Usually money saved in a bank will garner a small amount of interest. Money kept at home will obviously give you no interest.
- Longer Term – Generally this is money that you can part with for a minimum of 3 to 5 years (sometimes longer.) Examples may include saving for a child’s college, planning retirement or growing money beyond what a savings account can offer.
- Harder to Access – Depending on the type of investment, money may be harder to access until a certain pre-determined term has elapsed or until processing takes place.
- There is risk – No investments are without risk. Some are riskier than others. Risk is the reason there is a lot of opportunity with investing but also the reason you shouldn’t invest money that you rely on for basic bills, necessities or emergencies.
- Potential Profit – This is what investing is all about. If invested wisely, the investment can make a lot of potential profit that would be unimaginable in a savings account.
So now that you are a little familiar with the differences between investing and saving, let’s talk about the different investment types that exist.
Types of Investments
There are many types of investments. For the sake of this lesson, I’m going to discuss 4 types of investments. Future lessons and articles on this website may have other examples. For now though, I would like to focus on Mutual Funds, Stocks, Bonds, and Real Estate. If you understand the difference between these investment types, you will probably be able to identify other potential investments on your own.
- Mutual Funds – Professionally managed portfolios of stocks and bonds. If you put your money in a mutual fund, a fund manager will diversify your money along with many other people’s money into a mixture of stocks and bonds. Depending on the fund will determine the amount of risk you are accepting. The good thing about a Mutual Fund is that it is safer than hand picking 1 or 2 stocks yourself and the money is managed for you. A drawback is that there is obviously a fee that will go along with this. It’s important to choose a Mutual Fund that you can accept the fee and feel comfortable with risk/reward ratio that goes along with that fund.
- Stocks – Buying and selling individual stocks is another form of investing. When you buy units of stock (called shares in market terminology) you are becoming a part-owner of that company. For example if I buy 10 shares of a company’s stock, I have 10 units of ownership of that company. Someone that owns 100 shares owns 10x the amount of the company that I own. What makes these enticing is that if you buy shares of stock in a company that you believe in and the company does well from year to year, your shares will increase in value and build you a profitable investment. The risk that is attached comes from the potential decline in value is the company has a bad year or begins to decline in value.
- Bonds – Corporations and Governments issue bonds to raise funds for projects and to help speed up growth. These bonds are issued for a set amount of time (for example: 5 years). At the end of the 5 years, you will receive the money that you loaned with a pre-defined interest. Generally considered safer than stocks, there is still the risk that the company defaults and is unable to pay you back your bond.
- Real Estate – If there is one thing that the Earth has a fixed amount of, it’s land. Investing in Real Estate is one of most popular forms of investing. Purchasing property is a form of investment in real estate. Choosing to purchase REIT (Real Estate Investment Trusts) is another way to invest and is done so in a similar fashion as buying shares of stock.
How Do I Start Investing?
This is where I have to tell you, DO YOUR HOMEWORK! There are many places to start investing and many things to invest your money in. I can’t tell you the best place to invest your hard earned money because you may have a different investment goal or time frame than me. What I can say is that there are many places to invest and that some are safer than others.
If you want to invest in a mutual fund, choose a company that has been around for a while and is very established. If you want to buy and trade stocks or bonds, there are tons of websites that allow this. Choose one that feels right for you but be mindful of any fees, minimum deposits and ease of use.
If you want to invest in Real Estate, choosing to purchase property can feel intimidating and daunting. Ensure you do you due diligence and do not rush into a purchase. Choosing to invest in a REIT may be better if you want a more hands off approach.
How to Start Investing with Little Money
First, ensure you are not investing money that you are going to need right away. I could go on and on about how important it is to invest money that you don’t expect to need for at least 3 to 5 years but I think I will leave that for a later article. Ensure you have a separate savings first that is for emergencies or short term goals. Imagine you are putting this investment money in a capsule that you can’t open again until a few years or even longer down the road. This will give you a higher chance of realizing a profit and being happy with your results. Now that you have done that, lets talk about the best way to get started.
Choose Investments that don’t require a lot of money to get started. There are some sites that you can register for that require NO minimum balance and allow you to trade even the smallest amounts such as Robinhood and WeBull. These are two sites that specialize in trading stocks and best of all they are completely free to use. Read my full Robinhood Review for more information on how to trade stocks with no commission fees or hidden costs.
So There You Have It!
Hopefully you know a little bit to get started with investing. You should know the difference between investing and saving, the different types of investing, and how to start investing. Best of all you should know how to start investing with little money.
I hope this was interesting and not overwhelming. If you have any questions or comments, feel free to leave me a comment below. If you thought this article was useful and know even one other person that could benefit from it, I encourage you to share this.
So, lets start investing!