Investing: what I learned in my first year
And which are the key points that helped changing my mindset about money.
Note: you can find the Spanish version here.
Something I realised during my career is that, if everything went well, at some point, I would be earning more than what I actually need. And so, this happened slightly more than one year ago.
I started to realise that the few thousand euros that were idling in my bank account, would soon start to actually grow and become even more idle, and this brought to my mind the fact that maybe, just maybe, I could do something useful with that money. And so, my adventure into the investment world started without me even knowing — Looking up in Google “what can I do with my idle money”.
After some minutes googling around, some of the keywords I found were ringing a bell: trading, stocks, dividends, cryptocurrencies…
At that point, given that I had some certificates of stocks that were giving dividends in the company I worked for back then (around 200€/year), I started to fantasise of how much money it would take to earn, in dividends, the equivalent of my monthly salary.
But the good side is, that would also help me realise that I needed to start doing something about it.
This encouraged me to delve deeper into the rabbit hole of investing, and I learned another keyword, and probably the one that helped me shape my current mindset and savings plan: financial independence.
Discovering that being able to live without having to worry about money started the gears in my head and I spent a lot of time reading books and blogs about people that are on the same journey I was willing to embark. These are the key points that moved me to start investing and changed everything in how I saw my finances and savings strategy:
1. Avoid buying stuff you don’t need
Since earning more is way harder than spending less, let’s try to do this in order to improve the amount we can invest each month. Minimalism is an awesome movement that can help you with that, but in general, knowing and writing down what you spend the money on helps pin down those expenses that can be easily avoided.
You know, try to avoid that coffee you always get on your way to the office.
2. Inflation is killing your savings
According to wikipedia, in economics, inflation is a sustained increase in the general price level of goods and services in an economy over a period of time.
Which in turn means:
Your absolute amount of money will be able to purchase less and less each year.
In my country, the average year to year inflation is around 2–3%, which means that I’m losing that percentage of purchasing power over my savings each year. This is sad. So sad.
In the end, your money idle in your bank account is making you lose money. It makes no sense, I know.
3. Stock market is not a casino.
Even though the stock market is mostly unpredictable, studies tell us that, in the long run, stocks will always go up. And when I mean long run, I mean 20+ years. Which means that even though we might face some crisis along the way, if you are patient, your money can only go up.
We can minimise the randomness and complexity of the market by staying put for a long time.
The longer you keep your money invested, the easier it is for it to give positive returns. So, start early, stay put.
4. Diversification is key
You can invest in other assets like gold, cryptocurrencies, crowdlending, stocks, real estate and for sure there are more opportunities out there. Even staying only on the stocks market is a good idea to diversify in countries, currencies and markets.
Diversification helps compensate possible losses.
Since there are a lot of places where you can put your money, you may as well do it. The less correlated they are, the better. Choosing assets with low correlation with each other can help reduce the risk of your portfolio. For example, the most common way to diversify in a portfolio of stocks is to include bonds, as the two have historically had a lower degree of correlation with each other. This means that even though some of your money might be compromised, you will be invested in other assets that might not be going down, and are instead, doing well.
But summarising, when investing, and more-so when investing to achieve your financial independence, you should take into account the following. And in this order:
- Your health
- Your financial education
- Your professional skills
This is because you need to be healthy to enjoy your money and the free time that may go with it. Improving your financial education would mean that knowing more about how money works will improve your chances of earning even more money. Those are the key things you have to bear in mind if you want to achieve FIRE.
Financial Independence, Retire Early 🔥
And while doing so, aside from reducing your expenses, you should aim to increase your income. Usually the easiest way of doing that is finding a way to get promoted at work (or even changing jobs altogether if you feel your professional growth is capped). Earning more money means you can invest more money. But in the end, as a rule of thumb, the more financial education that you have, the more successful that you will be in your finances, and so, in life as well.
