Everyone would agree that investing is something that financially smart people do. However, not everyone who has the money does it. Why?
There are many reasons but the most common are usually: one, they don’t know how to start or two, they’re really afraid to lose their money.
If you’re this type of person, then here’s a simple investing guide for you.
I’ve always believed that a person will not be successful in investing if he does not know how to save money. Saving is a habit that all investors have. So before thinking of becoming an investor, first – be a saver.
Time Deposits / SDAs
Time deposits and special deposit accounts (SDA) are your next investment considerations. In my opinion, once you have around three months worth of monthly expenses in your savings account, then it’s time to funnel the rest of your emergency fund to a TD or SDA.
How much should you put in these investments? I’d say another three months worth of your monthly expenses, but it can be more. Personally, I have six months worth of expenses on time deposits – which gives me a total of nine months worth of emergency fund (that’s savings plus TDs).
Low Risk Investments
So far, you’ve covered your very immediate future. At best, no financial emergency will be bad enough to break you. And because of that, it’s now time for you to face a money saver’s greatest enemy – inflation.
Insurance, treasury bills, low-risk bonds and some mutual funds, are just some of the things where you can invest on. These instruments will more often than not, give you enough interest rates to at least keep up with inflation.
Medium Risk Investments
Low risk investments are there to help you keep up with inflation, but if you really want to beat it, then you have to take medium risk investments. Balanced funds, selected stocks, some real estate investments and small to medium-scale business ventures are examples of these.
Medium risk investments typically earn money after at least two or three years. So the amount of money you should invest here must be an amount which you’ll never need during that much period from the present time.
High Risk Investments
Medium risk investments will beat inflation, but they will rarely make you rich. Big investment wealth can only come from high risk investments such as large-scale business ventures, foreign exchange, real estate, stocks and aggressive funds.
These investments will typically need at least five years before you can realize profit, some even longer. I know it can be a long time but I will tell you now – it’s really worth the wait. Just think of it as a marshmallow test.
- Save money first – track expenses, pay yourself first, make it automatic.
- Build an emergency fund and put it on zero risk investments (TDs, etc)
- Keep up with inflation through low risk investments.
- Beat inflation with medium risk investments.
- Accumulate big wealth by choosing high risk investments.
Do not be afraid to invest. If you’re afraid to lose money, then diversify your portfolio by investing in different types of instruments. Furthermore, invest with a long time horizon. These two strategies can really minimize, if not eliminate, investment losses.
The investing tips I wrote above is just a simplified guide and may not be the best option for you. Let a financial planner or an investment consultant give you additional advice before you decide to invest on anything.
Furthermore, it’s usually never good to invest just for the sake of investing. One needs to have an investing objective – a specific reason – why you’d want to invest.
To learn more about investing in greater detail, I really suggest you read my two-part article, A Beginner’s Guide To Investing on Anything and Everything.
Photo credit: troy_williams
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