What is Investing?

This is the first post in Your Ultimate Guide to Investing for Beginners. To read all posts in order, start with What is Investing? then continue reading the rest of the series on this page.

Many people don’t invest because it seems overly complicated or too risky. The truth is that NOT investing for the future is one of the riskiest financial moves you can make.

What is Investing?

Anytime you invest, you’re devoting your own time, resources, or effort while anticipating good results to achieve a greater goal. Like, investing your weekends in a good cause, investing your intelligence in your job, or investing your time in a relationship. Investing money involves putting it in some form of security (stocks, UITFs, mutual funds) so it generates income, asset appreciation, or both – even while you sleep. In a nutshell, investing is putting your money to work for you.

The ultimate goal of investing is to be financially independent. Financial independence means being able to live off of your investments. It’s when your investment money is making you money, so you don’t have to work again!

Benefits of Investing

Whatever your financial circumstances and goals, investing moves you forward by:

Growing Your Wealth

If you want your money to grow, it is better to invest it than keeping it in a piggy bank or under your mattress. The money in your savings account or time deposit will earn some interest and keep it safe, but investing in mutual funds, bonds or stocks could increase it significantly.

Achieving Financial Goals

Achieving financial goals like purchasing a house, your child’s education or going on a dream vacation is possible by investing money. Depending on your financial goals, investments plans can be long-term, short-term or medium term. You can choose a long term plan for your retirement or your child’s college education or a medium term plan to go Western European tour after a few years.

Beating Inflation

Even if you’re a really good saver, and are putting away piles of money in a bank savings account instead of investing, your savinga account is still affected by inflation.

The #1 Wealth Killer is Inflation

Inflation increases the prices of goods and services, brings your purchasing power down and can potentially lower your standard of living. By investing wisely, you can beat inflation and make your money grow at a rate faster than inflation.

Saving vs Investing

Saving and investing are two unique concepts, and it’s important to understand the difference between them and the need for each.

Saving, by definition, involves the protection and preservation of money from loss. Saving is typically for smaller, shorter-term goals in the near future like going on vacation or having money for an emergency. Money in savings are readily accessible. It’s at minimal or no risk and you can earn interest by putting money in a savings account, but generally earns a lower return than investments.

Investing, on the other hand, means to make a LONG TERM COMMITMENT of putting money away and letting it grow. Unlike money in savings, investments always involves risk but have the potential for higher return than a regular savings account.

Three Things to Consider Before Investing

Create and Maintain an Emergency Fund

Most smart investors put enough money in a savings product to cover an emergency, like sudden unemployment or accidents. Make sure they have up to three to six months of your income in savings that is readily accessible. Having an emergency fund will help you meet your expenses without pulling out the money you set aside for your investment plans.

Note: You can build up your emergency fund while investing your money. Just remember to prioritize your emergency fund first. Emergency funds are for your short-term needs, while investment funds are for your long-term needs.

Pay Off Your High Interest Debt

Putting away money for investment while paying a lot of money towards interest on your loans is not a good idea. This is especially true when what you pay towards interest could be more than what you would potentially earn through your investments. If you owe money on high interest loans, the wisest thing you can do is to pay off the balance in full as quickly as possible. Once your debts under control or if you are free from debt, you can start planning your investments and grow your wealth.

Having Appropriate Insurance Coverage

Life insurance, health insurance and disability insurance are all important and need to be considered alongside any decision to invest. You need to make sure your family and loved ones can cope financially should anything unfortunate happens to you.

If you don’t have any investments, don’t panic.

Now’s a great time to start.

{Go to the Next Post: Identify Your Investment Goals and Needs}

photo credit: business woman via photopin (license)

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