Investing is the process of putting your saved capital and money to generate additional appreciation and income in the future. Another way of saying it is putting your money to work to get more money later.
You can think about investing as money that generates more money without too much of your effort. When investing, you are not exchanging time for money the way you do at your day job or personal business. The beautiful thing is that money never sleeps, never gets tired, never takes breaks, and attracts more money as long as you, as an investor, make the right investing decisions.
Investing is like driving. It may seem a little bit intimidating at first because it’s unfamiliar and you’ve never done it before. It takes guts and a little nudge to finally get to it. It takes practice and experience to eventually get things right. Roadblocks and uncertainties may be encountered along the way. And then, you finally get the hang of it. You realize it’s not as complicated as you thought it would be. You finally start to enjoy doing it – and that’s when the real fun begins.
Like driving, investing is generally viewed as a means to an end. Driving enables you to get from one place to another, while investing helps you get from where you are now to your desired financial freedom and goals. Speeding through the lanes while driving can be compared to investing in riskier securities – you can get to where you want faster, but the risk is definitely higher.
What is Investing?
So what is investing? It’s pretty straightforward, actually. Investing is basically getting your money to work for you. There are numerous ways and means of investing but when you break it down, the objective is always to generate income or profit from your invested capital. First, you put your money or other resources to purchase investments, such as financial securities or any asset that is intended to generate income or sold at a higher value in the future. The income you get from investing is generally called “passive income” – simply because, unlike your day job, you earn without having to actively work for it.
Return on assets (ROA) and return on equity (ROE) are some of the key metrics you, as an investor, would be looking to increase. We’ll go into details of these and other metrics later, but for now just understand that these are percentage returns on your invested capital, money and invested assets.
Who is Investing For?
Investing is for anyone who wishes to maximize their earning potential, increase their sense of security, and overall improve the quality of their lives. However, even if you make a lot of money working as a software engineer or CEO, that does not mean you have money that can be put into investing. You first need some initial capital or money to start investing. If you are spending everything you are earning, or worse; if you are spending more than you’re earning, then you most likely can’t start investing until you get out of debt and begin accumulating money. This is usually in the form of savings or excess cash in your bank account. So it’s not about what you earn, it’s about what you keep at the end of the month.
The formula is simple:
Income – Expenses = Savings
When your income is higher than your expenses, you accumulate savings. Those savings can be used as capital for investing. If done right, investments generate more income which can be used for more investing (this is called compounding) or for improving your life style or achieving other financial objectives. Sounds somewhat similar to your goals? We’re here to help you break down the nitty-gritty technicalities of investing and provide you with what you need to know before you get started.
How Do I Get Started with Investing?
- Start by accumulating savings. But we already talked about that.
- Educate yourself about investing and finance. Hopefully this is why you’re here. If you stick with this program and read through as much of this website as possible, you will be way ahead of most people who are clueless on the subject of making their money work for them. Most people are just chasing that next shiny luxury car, or that bigger house (with a bigger mortgage), but you’re here for a reason. So stick around and learn.
- Figure out what you’re investing for. What risks you’re willing to take. What are some of your unique circumstances and constraints you need to consider before making investing decisions.
- Figure out the best asset allocation that correspond to your goals, risk tolerance and other constraints you noticed in step 3.
- Select your investment vehicles and individual securities. There are many choices out there. These include stocks, real estate properties, private equity businesses, bonds, ETFs, mutual funds, index funds, forex markets, commodities, and many other alternative investments.
- Monitor your portfolio and re-balance as needed. Monitoring is an ongoing process. You’d want to look at how your investments are doing on a regular basis; weekly, monthly or at least yearly. When your circumstances change or your investments are out of line with your goals and risk tolerance you may need to sell some of your assets or buy additional ones.
This can seem daunting and overwhelming, but we’ll walk you though these steps one by one on Investor Academy.
So before you rush to the mall and finally purchase that gadget you’ve been eyeing on, or dine in that newly-opened high-priced restaurant, ask yourself first – Am I better off investing this money instead? You know what they say… Sometimes it’s good to delay the gratification. Now, are you excited on your investing adventure? We know we are.
Go into the next article to discover more about investing and why it’s important.