Learning to invest and grow your money
Is there anything more exciting than investing your money and earning interest on it? There’s something satisfying about watching your bank account grow and you get closer to being financially independent.
There are a lot of ways to invest, but we’ll keep it simple by outlining the different types of investments you can make with your money: stocks, bonds, mutual funds, index funds, ETFs. We’ll cover what each type entails and how they work before giving you some tips on how to start investing for beginners.
Common Types of Investments
Stocks – Stocks are awarded to investors for giving a company money to use in its business. You can sell them and become a stockbroker. The higher up your stake, the more money you make. For example, if you have $1000 invested in Google, and Google stocks go up by $100, you’ll be able to sell it for $1100. Stocks can be traded on a stock exchange which means they’re publicly listed and easily bought and sold. This makes them a lot more liquid than mutual funds or bonds, but they often have higher tax rates as corporations pay taxes whereas individuals don’t always need to pay taxes on their investments.
Mutual Funds – Mutual funds can be both individual and institutional. They’re owned by thousands of investors who buy units of the fund, just like individuals do with stocks. However, unlike individual stocks, they’re also owned by large institutional investors like pension plans and mutual endowments. This means mutual funds are usually presented in portfolios that represent an entire industry or even global market. When you invest in a mutual fund you’re buying into a group of companies including their subsidiaries or other related companies that the company invests in. Mutual funds can be traded on the stock exchange but they usually have higher fees due to higher trading volumes and lower yields (because of their investment strategy). Mutual funds usually come with lower penalties for early withdrawal. But, you’ll also have to pay taxes on your investment earnings.
Index Funds – Index funds are mutual funds that track a specific market index like the Toronto Stock Exchange (TSX) or the Dow Jones Industrial Average (DJIA). The purpose is to replicate how the index does over time. This means you’re investing in the entire market which reduces risk and increases diversification, but index funds don’t guarantee any return on your money and you won’t be able to sell individual assets in your fund. Index funds are usually bought by large investors trying to maximize their overall returns by investing passively rather than actively. Index funds are the safest investment but they also have the lowest yields.
Exchange Traded Funds (ETFs) – ETFs or exchange traded funds are similar to index mutual funds except they’re bought and sold like stocks on a stock exchange. For example, if your ETF is tracking the S&P500, you’re buying into 500 large cap companies rather than 50,000 companies that the S&P500 represents. This gives you a higher level of diversification while trading like a stock which means you can buy and sell whenever you want—like stocks. However, unlike index funds, ETFs can be traded like stocks and can open you up to tax savings.
Tips for Beginners
Start with a low-risk, intermediate term investment – If you’re trying to get started with investing in your stock market for the first time or if you haven’t invested in the past 5 years, then you don’t want to go all in on one big purchase right off the bat. You want something that will allow for smaller investments that you can grow over time. Something like an intermediate term bond investment is a great way to start as it allows for higher returns than a savings account and still represents some degree of risk (if interest rates rise). If you want to start investing with a small amount of money (less than $1000) and are comfortable with the risks involved, then an equity index fund is perfect for your needs. Equity index funds track the total market return (the S&P500).
Don’t use credit cards to invest – Using credit cards will decrease your ability to repay that debt. Using it as an investment will destroy your financial health and inadvertently contribute to debt problems. Credit card debt is not a smart decision that should be made without careful planning. There are ways to invest on a low budget without using credit cards (e.g. saving for a mutual fund or even an ETF) and paying small amounts on your investment will help you become a smarter investor in the long run.
Try dollar cost averaging – If you don’t want to risk losing money, then dollar cost averaging is the way to go. It means investing a fixed amount of money each month (one hundred dollars) over time to minimize risk and ensure steady growth no matter what the market is doing. The downside of this strategy is that if you had invested all your money at once, you could have potentially made more. The upside here is that it’s safe and will guarantee better returns than keeping your cash locked up in a savings account while also building your portfolio slowly over time.
Analyze your investments frequently – If you don’t want to invest in the market, then start a simple spreadsheet or financial tracking app on your phone and track your money. It’s important to know what you’re doing, when you’re doing it, what you should have left over after your monthly bills and from where your money is coming from. A lot of people think they have more money than they do because they don’t understand their spending habits or how their spending compares to their income. We recommend a free budgeting tool called You Need a Budget (YNAB) which is a great way to get started with managing money.
Set up an auto-pay for your investment transactions – Set up an auto-pay for your investments so you don’t forget them. This is also a great way to make sure that you’re saving at the right time of day so that you don’t have to worry about making it to the bank as late.
Buy mutual funds in a taxable account – If you’re worried about tax, then investing in a mutual fund instead of doing it directly in your savings account can help. The reason is because with mutual funds, there are lower taxes on distributions (as they are treated as income) compared to direct investments.
Conclusion
So, there you have it folks, your crash course on income investing.
Remember that if you can increase your income, you’ll be able to save more money which will allow you to invest more money. If you want to increase your income, then focus on increasing your productivity and getting rid of useless expenses. This is the #1 way to grow your income and give yourself a chance to invest in the market and build wealth for the long-run. Remember that we’re all in this together! Good luck!
We also recommend reading our article on How Much Money Should You Have Saved by 30? here for more tips on saving money and growing your portfolio over time with mutual funds.