Yes, I just said the dreaded word, investing. It is hard for me to fathom why so many people my age are intimated by the word and of course, actually investing money. I have to remind myself that I was once afraid to invest as well. I was terrified to lose my money until I realized how EVERYONE invests in something EVERYDAY.
If you choose to keep your all of your money in the bank, you are “investing” in the bank.
If you use the money to buy a book, you are investing in your education by learning something new that could make you a million bucks.
If you use the money to buy clothes from Gap, you are investing in your image and for Gap to continue to make clothing.
If you use the money to buy a car, you are investing in wherever that car will take you (work, school, practice, charity event).
And if you use the money to buy bottle service at a Vegas nightclub full of douchebags, well, no comment.
I also realized how I was losing money by NOT investing.
After thinking about investing in terms of everyday life, I became more comfortable with the idea of putting my money to work. It was nice to think about how my money could start working for itself, instead of just me working for money.
If you want to get serious about investing, below is a great starting point for you.
Why invest? There are a lot of reasons to invest, but the reason most people invest is so they can put their money to work in order to accomplish certain goals.
Some goals may include quitting your job to travel the world, starting a business, paying for college, or just to be able to live a comfortable life during retirement.
Another reason people invest is to keep up with Inflation. Inflation is basically the thought that things will cost more in the future and your money will not be worth as much as it is now.
Whatever it is, it is critical to know WHY you are investing and WHAT you are investing in.
Stocks. Because stock means equity, if you own stock in a company, you own a part of that company. Buying stock in individual companies is considered riskier than buying a mutual fund that may hold hundreds of different stocks and bonds while being overseen by a fund manager.
Bonds. Remember that time your friend had to borrow money for lunch and he promised to pay you back? Bonds work the same way except the companies will typically pay you back after a certain amount of time.
Wait, what’s in it for me? The companies will pay you interest until your bond matures.
CD’s. CD’s, or Certificates of Deposit, work similarly to bonds, except you’re generally giving money to a bank for a specified period of time in order to earn an interest rate.
Nowadays, these pay low interest rates and are commonly bought by people that are conservative because they are generally insured by the FDIC.
Savings Account. Your savings account is NOT invested in the stock market. When you have money in a savings account, the bank does not put your money under a mattress. Banks will offer you .000000000001 percent (not really but it feels like it), to keep the money in savings while they lend it out to people for a much higher interest rate than what they are paying you.
That means that the bank is investing the money for you (not literally), while you make just enough to buy a cup of coffee after a few years.
Investing money is typically a long term strategy. If someone you meet tells you that they just “day trade” for a living…..their parents are either rich and just throw money at the kids, they are lying because they just got laid off work, or they are trying to take you on a date. There are very few “day traders” out there that make a living by just buying and selling securities. Smart investors like Warren Buffett invest in strong companies that they like, and hold on to them for the long run. Buffett is a big shareholder of Coca-Cola and loves it so much that he drinks up to five cans of Coke per day. WARNING: Please, don’t try this at home.
That being said, there is NEVER a guarantee that you will make money. Whenever someone uses the word guarantee, you better hope it’s the guy from Men’s Wearhouse and not your financial advisor.
You are always taking a risk for an investment to perform as it did in the past or from projections of how it will do.
What is compound interest? As stated above, the reason investing is typically a long term strategy is because investing early can be extremely advantageous when compound interest is involved. It is interest calculated on the initial premium and on the accumulated interest. Investopedia also likes to say that it can be thought of as “interest on interest.”
Do I need a financial advisor? No. There are hundreds of great resources and affordable trading platforms online such as Scottrade and Etrade. Both of these companies can help you with research as well.
My new favorite companies that are helping millennials invest are Robinhood and Acorns. Robinhood is a startup that offers $0 trades in order to make it affordable to investors who don’t have very much to invest, and Acorns provides an extremely easy way to save and invest by investing your spare change. I even wrote a post that talks about how great Acorns is and how easy it is to get started.
If you are serious of learning more about investing, I recommend reading one of these 12 Books That Every Investor Should Read.
You are never too young to start investing…remember, compound interest!