One of the big topics within the world of personal finance is investing. Investing involves spending money now to make more money in the future. What you spend your money on today will impact your financial future so it’s important to understand the consequences of your expenditures. Many Canadians invest their money to save for the future and afford their long term financial goals. To learn more about what investing is and how you can make the best investing decisions, explore the article below.
What is Investing?
Investing is the process of spending money to make more money. In simpler terms, investing means taking the cash that you have and spending it on something that will make you more money in the future. Unfortunately, buying things like food and clothes are merely expenses that will not make you money in the future. On the other hand, purchasing a bond or a house has a high chance of making you money down the road.
A look at safe vs. risky investments, click here.
What Can I Invest In?
Anything that requires you to pay money now for profit in the future would be considered an investment. That being said, there are common types of investments that many Canadians put their money into. Below is a list of common types of investments.
- Stocks and Options
- Bonds
- Investment Funds
- Bank Investment Products
- Retirement Investment Products
- Life Insurance
- Property and Real Estate
Why is it Important to Invest?
Investing is important for two reasons. First, if you have extra cash sitting in your bank account or idle cash left from your pay cheque after expenses, you may as well put it to use and make more money for yourself. Second, investing is a way of making significant additional money on top of your regular income. That additional money can help you retire down the road or finance a large purchase, such as a house or car.
It is important to note that investment income is passive income. Passive income means that you didn’t put in significant work to make the money. Unlike a job or running a business, passive income involves investing money to turn a profit, that’s about it. Making money without doing anything sounds like a sweet deal!
Beginner Tips and Tricks For Investing
Investing money for passive income is a lot easier said than done. People invest with the intention of making more money, but there is always a risk that you could lose part or all the money you invested. To minimize the risk of losing your invested money, below are some tips and tricks for beginner investors.
Put Money Aside
Before you can start to invest, you will need to build up some cash. A big part of personal finance is saving, part of your savings can go toward investing. To start building up an investment fund, allocate a percentage of your paycheque to put into savings. Think of the percentage of your pay cheque as a small payment toward making more money down the line, as well as an investment in your future.
Be sure that you still have some money set aside as an emergency fund too. Once your money has been invested, it can take a little while to convert back into cash. To handle an emergency, bare cash goes a long way.
Diversification
In the world of investing, the higher the risk of the investment, the more money you will make (or lose). This means that a low-risk investment has more of a guarantee to make you money, but you won’t make as much money as with a high-risk investment.
This doesn’t mean you shouldn’t take a chance on a high-risk investment, after all, you want to make big bucks. What this means is you need to diversify the types of investments you make. Instead of only investing in one type of asset, you should invest in assets of all types and levels of risk. For example, in your investment portfolio, you should have a healthy mix of bonds, stocks, and retirement investments. To determine the level of risk on assets before investing, do your research on the asset type, company, and market.
Only Make Investments that You Understand
Part of investing is believing in yourself and your decisions. Friends and family may make investing suggestions based on their investments, but that doesn’t mean that it is a good idea for you to invest.
When you’re doing research on potential investments, only spend money on investments that you understand and make sense to you. The chances of turning a profit are higher if you do this. Perhaps you have extensive knowledge in the construction industry, investing in this sector makes sense because you understand the market and can more accurately determine if a profit is likely or not.
Pay Attention to the News
What is going on in the world has an impact on global markets which eventually trickles down to the smallest markets of the world. Part of making investment decisions is paying attention to the news. Try your best to refer to more than one news source to get the most reliable information.
Live and Learn
Even the best of investors make mistakes and lose money on investments, you will too. When this happens, cut your losses and learn from the mistake. As you continue to invest, you will make fewer mistakes. This is why it is important not to invest all of your money in one place, you don’t want one little mistake to turn into a catastrophe.
Think Long Term
Investing generally makes you money in the long run, not the short run. To save yourself some financial stress, all of your investing goals should be long term. As an example, saving for retirement or a large asset purchase years away from now is a good goal for investing purposes.
Logic Over Emotions
Investing should always involve logical decisions over emotional decisions. Perhaps you want to invest in Apple’s stocks because it is your favourite technology company and you are a loyal customer. But, did you consider their financial performance, stock growth, and dividends? Maybe they’re not performing as well as your emotions would lead you to believe. Investing with emotions could cause money loss at some point, make decisions using logic instead.
How to Start Investing
Before you can start investing, you will need a brokerage account. A brokerage account is an investment account that you open with a licensed brokerage firm, such as an online broker or stockbroker like Qtrade. Once you open a brokerage account, you can deposit money and use it to purchase investments.
Before opening a brokerage account, take the time to research and consider the company and product. Most brokerage accounts don’t have fees but read the fine print to make sure.
What If I Don’t Have Money to Invest?
Unfortunately, investing relies on the idea that you need to spend money to make money. In fact, this is precisely why the rich get richer, they have money to spend that will make them more money.
Investing is only wise when you have excess money that you don’t need for other things. If you don’t have money to invest, you have two options. First, you can take a small portion of your pay cheque to slowly build a fund for investment purposes. Alternatively, you can consider other investment options. For example, a home is an investment. If you’re already paying rent, you can likely afford the cost of a mortgage.
One final point is that investment has a lot to do with timing. Before you can invest in markets, you need to invest in yourself first and that is okay. Maybe you don’t have the money to invest now, but perhaps you’re in school to get a better job or are working toward a promotion. Once you get yourself into a position where you’re earning more money you can consider investing more seriously.
Final Thoughts
Investing is sort of like an extra expense that you pay now to secure more money in the future. Like all expenses, it is important to consider if it fits into your budget and what the benefit is to you by spending that money. If you don’t have room in your budget to invest now, that is perfectly okay. Sometimes other expenses are more crucial and important now. If you do have the money to invest, be sure that you invest smart, reasonably and with logic.
