Learn basics of investing

The fact that you have come to this page proves that you want to learn the basics of investing. The chances are that you’ve put aside some money or you you plan to do this for investment. Why you save money? Want to use this for higher education of your children? Whether you want a new car? A a house in the country side? Or simply you need to sepnd this money on a world tour? The reasons may be several the fact remains that you have come here to understand how to achieve your goals and to develop your basics of investing.
Suppose you take € 1,000 from your savings and you invest it in shares. If your money grows at the rate of 11% (the historical average on the stock) per year it will grow to € 53.416 , within 30 years. This would certainly fetch you a nice car, isnt it?

But maybe you do not currently have € 1,000 to invest, and maximum you spare is € 4 per day. It menas you will take approximately 250 days to generate € 1,000. I know € 1,000 is not very big amount but if you continue to save and invest (average 11% return per year) € 4 per day for next 45 years you will have € One million in your bank balance. Suppose you are only 20 years of age as on today, after 45 years you will be just at the point of retirement. Let me tell you retireing with financial independence (having a million in your kitty) will allow you to lead a stypish lifestyle.

I have set you a target of saving and investing of only € 4 per day, but you will be able to save more money as you grow older and become less financially dependent. So incase you do have 45 years before retirement still you have a good chance of becoming a millionire by increasing the target of € 4 per day. Suppose you can save € 166 monthly, you will need only 38 years to reach a million mark.

In order to keep it simple just remember that in order to build a fortune you must invest your money. It takes just minimum effort to set aside a small amount each month and your money grow. By investing in the stock market will get more money for retirement, education, leisure, etc.

The power of compounding of money
Please see the below tabulated data, it specifies how one-time investment of € 100 grows at different interest rates and maturities. Five percent interest will fetch you the same returns as that of savings certificate, 10% is less than the average annual growth rate of the stock and 15% or more retun is possible if you follow the advice of investing methods of Warren Buffett .

Why is the difference between in retuns with a small percentile changes here and there? You are witnessing the miracle of compound interest! Compund interest can let your capital earn huge fortune. By small increment in the lifetime of investment or in annual return, the result on ultimate amount is exponential. As seen above, € 100 invested for at the rate of 15% per year interest will have the follwoing dramatic recults with varying time. You will notice that the multiplying power of invested money dramatically increases with passage of time.

Let us introduce you to two teenagers (18): Jack and Jill. Jack decides to save and invest (12% per annum) €1000 each year till his retirement (60 years). In this 42 years Jack amassed a massive amount of  one million (€ 1,000,000) making him a free bird (financially independent at the time of retirement. He will never become a burden to his family and societ or even to his government in old age.

Jill on the other hand led a lavish life till 40 years of age. Every year he renews his car and spends his money on a nicer car. When he was 40, he realized that he must save for his bad his old days. He started violently to save and invest € 10,000 annually in stocks for the next 20 years. But even such aggressive investment (10 times more than Jack) did not fetched him enough to become a milllionire. He amassed € 800,000 in 20 years @ 12% per annum.

We will come back extensively on the subject of compound interest, but it should already be clear that it is very important to start investing early. Once you invest your money you are letting your money work for you instead of working vice versa.

Get ready to invest
After all these impressive figures you’ve seen, you probably are anxious to own shares. Not so fast, now you can barely walk, but will have to walk soon. Now that you know the importance of compound interest, lets discuss another important aspect of investment.

Suppose you have a debt of € 5,000 to a credit card company. These institutions charge a 18% interest quickly. It does not make sense to save money and invest, while at the same time your debts are also rapidly multiplying. Every euro you can invest, it work for you. It is important to settle your high interest charging debts (like credit cards) before you start investing. If you have a sum of money in your account and you can choose between paying credit card debt and investment then please pay off your debt first.

Pay yourself first
How can you be a successful investor? By knowing how to control expenses, saving and investmet a common can claim to be an investor. Whether it’s a apending on monthly bills, groceries, vegetables, vacations, maintenence etc every thing must be planned and executed. Objective shall be to know exactly how your money is flowing and how much you can hold on as savings. Fix a savings target and pay yourself this money at the beginning of each month. After you have paid your self then pay your bills etc rather than doing vice versa.

We do not say you must be obsessed by money and your every-day-old bread and water to eat. There is one simple way, every month set aside a fixed amount of money without you noticing. If you want all bills such as gas, electricity, telephone and insurance to be paid it must be paid after this. This is what is called pay-your-first. We recommend that you should start with saving 10% of your income and then invest. Depending on your lifestyle, standard of living and debts you can afford to increase your savings goal but try not to less than 10%. Remember, the more you can save, so much greater will be your fortune. But something is better than nothing. A few dollars you invest today will much more in future. Fix and use an automatic transfer system (discusss with your bank) so that a fixed percentage of your monthly income goes directly into your investment account (like SIP). You will be amazed how easy it is to live with few dollars less each month, probably you will even not notice this gap in your income. Instead in future you will not have words to thank your-self for this wise decision you made years back.

Pitfalls you should avoid
Before you proceed to learn to invest, we want to give you some pitfalls that is always good to keep in mind. These are mistakes that many people make when they start investing.

Supress the reasons for not investing
There is no guarantee that the stock market is going to rise or fall the next day, months or even years after you have invested. But one thing is guaranteed that by doing nothing you will not be able to enjoy a comfortable retirement and attain financial independence.

Do not delay investing
Investment postponment is the dumbest thing you can do for your financial independence. You already know that the earlier you start, the greater will be your capital. If you are already well past 20, then we can only give an advice: Start now!

Pay your expensive debts before investing
If you have debts with high interest, pay it first. You do not need rocket science to realize that your 12% return on € 5000 will be out when you have a debt of € 5,000 charging you the rate @18% interest. In other ways I am asking you to tap the holes in your vessel which is draining your money faster that you are able to feed in. So first you pay expensive debts

Learn to distinguish between long term and short term investment options
People often are not clear on the difference between long term and short term investment options. Untrained investors often invests in shares for short term gains which is so wrong. One should invest that money in shares that they will not need for atleast 5/6 years in future. This is called long term investments.

Take advntage of employers retirement plans
If your employer is proposing a retirement savings plan then never say no to this. Most often it will also save you hell of tax that will be otherwise deducted form your pay cheque.

Do not avoid stocks because of risk
If you’re young, you should invest most of your money in shares. Being young gives you that extra time to absorb and make-up for any dips into the market. Needless to say that staying invested will also give you advantage of compound interest. In later year of your life you can invest your money in CDs, Bonds, bank deposits etc which give you almost assured retuns with minimum risk.

By doing nothing you can more in shares
The best approach to investing is to invest long term. Choose your stock carefully and you will be subsequently benefitted more than you ever thought possible. Frequest buying and selling of shares imposes high transaction rates which greatly diminished your profitability. Actually by doing nothing you can more in shares.

Conclusion
The main lesson in this? Yes indeed! I will repeat it again: compound interest. Start investing in stocks very early in your life. Rremember that it is still not too late, doing something is better than doing nothing. A third major lesson is that you should set aside a monthly amount for your investment before you start paying your monthly bills. Start the process of automatic investment and you’ll find it extremely easy, without much effort. And the last lesson to remember is that do not hold on to expensive debts. Pay it so first off, before you start investing.

Related posts:

1. Learn the steps of investing your money
2. Learn the basic stock investing rules