Investing for beginners - Part 1
Looking to start building a more passive income or whether its just to build some financial stability and security, investment is something everyone should be thinking about.
In this two part series, I’ll be sharing with you some of the basic principles of money management and wealth building. In this part, we’ll be discussing how to set up the foundations before you should consider investing. Disclaimer: This is not financial advice and is for educational purposes only.
- Start early. As soon as you find yourself earning, this is when you should start planning how to make your money work for you. If you’re no longer young, don’t worry, better late than never!
- Build a solid foundation. Firstly, ensure you have no debts. Work towards paying off your credit cards and loans and short term financial obligations. But not all finance is bad, some forms of finance you can maintain before you start investing, For e.g. a mortgage. Other than real estate, a simple rule you can follow when considering whether you should purchase something on finance is that if you can’t buy at least 2 of them in cash, you shouldn’t get the finance.
- Cost cut. Bring down your living costs as far as they can go. Look at unnecessary subscriptions, excessive unneeded luxuries, maybe even downgrade the internet connection. I can’t tell you what you do or don’t need, but whatever you spend monthly to live, should not exceed more that 75% of your take home pay. This includes all bills, food, fuel, mortgage/rent, car insurance etc.
- Make your spending work for you. Now that you’ve got your spending down, how can you benefit from what you do spend? Cashback. Vouchers. Offers. Look into what is available in your country. Being thrifty is something to be proud of. Any dumbass can go throw $10,000 in cash on a counter to buy something but the quiet guy in the corner who paid by card and a couple of vouchers, got the same thing for $7500 and $150 cashback, he’s the king of the castle. Silently build.
- Build a rainy day fund. Now that you’re down a maximum of 75% outgoing, put the other 25% away until you have at least 3 months of salary in savings. This will take you 1 year, but it’s worth the set up.
- You’re financially secure! You have at least 25% disposable income every month and a 3 month salary put away just in case. Now, what to do with those savings and that 25% (or more)….
- Make your savings work for you. Choose a low risk investment such as an interest bearing savings account where you will earn on your savings. Do not remove your earnings though, this miniscule amount of interest is to help with inflation. I suggest during this troubling economic times, you contribute and additional 5% monthly to your savings and just let it build.
- Investing. Finally we get there. The remaining 20% is yours to do with as you choose. You can buy something nice for yourself but that doesn’t make you money. You want this 20% to work for you. Crypto, stocks, shares, funds are all valid ways to invest but all carry their own risk. We’ll talk more about the basic principles of investment and points to keep in mind in Part 2.