Feb 19, 2022 5 min read Finance

How To Start Investing

We often question ourselves as to when we should start investing or purchase an asset. We get caught up in trying to find the right timing and getting validation from others. I mean, who can we really blame when we live in a world where data has become one of the most valuable resource. Every decision has now become so data driven that we sometimes forget to just trust our gut instincts.

Disclaimer: I am not a financial advisor and the things that I'm about to tell you are from my own personal experiences and you should always consider your own financial circumstances first before doing anything.

What Age Should I Start?

My go to response for this is always "Start Now". Now this obviously depends if you have a job or are earning some sort of income but the moment that you have some sort of consistent cashflow, you should look at budgeting it properly and start investing. If you're not too sure on how to budget or where to start, I use the 70/20/10 rule when it comes to budgeting which is great for anyone regardless if you're a beginner or not.

You probably would've learnt this in school but didn't think much of it and that is the power of compound interest. The basic principle of compound interest is the interest you earn on interest. It's easier to explain this through an example: so if you have $100 and it earns 5% interest each year, you'll have $105 at the end of the first year. At the end of the second year, you'll have $110.25 and so on. As you can see, the amount of interest is growing at an increasing rate, and the earlier you start, the more time you have for it to grow.

I love the power of compound interest as it is one of the best ways to grow your wealth. I like to think of it as using your money to make you more money. If you want to play around with how much compound interest can earn for you, then check out this compound interest calculator and start putting in some figures that you are able to afford and you'd be surprised with the outcome.

How Much Money Do I Need To Start?

This is a question I often see people asking as they think that when you start investing, you need A LOT of money. This is true to some degree but this all depends on WHAT you're investing in rather than how much you earn. Everyone has a different understanding of finance and investing so it is important to have the right mindset when it comes to investing.

Investing is a long term game and requires patience. Unless you're a day trader who understands the market well and is willing to take the risks, then you should NOT expect to be making thousands of dollars instantly. As we saw from the previous section, the power of compound interest works over a longer period of time and it can be different for each individual. It all depends on how much money you put into it. The more money you invest, the higher the returns are.

NOTE: This is in an ideal world where you're able to get a constant return, not everything can provide such a consistent return on investment. E.g. Dividends are based on the value and profitability of the company, so if it does well you get a higher return but if it doesn't then you'll get less

Depending on the asset that you're investing in, there could be barriers of entry where you require a minimum deposit. For example: To purchase a share, you need to purchase the entire share and thus require that exact amount. Whereas nowadays you can purchase part of an asset like Bitcoin, Managed funds and ETFs. So realistically, even if you only have $50, you can start investing today as the platforms and technology create less barriers to entry and endless possibilities.

What Are Some Assets That I Can Invest In?

There are so many opportunities when it comes to investing and are all dependent on your: financial circumstance, risk appetite and interests. There are always pros and cons to all of the investment options so make sure that you do your due diligence before committing any money into it. Some examples of where you could start are:

Shares/Stocks - If there is a company that you are interested in and believe in their core values, then this might be a great way to personally invest towards helping them achieve their goals whilst getting some dividends in return. (Note: not all companies pay out dividends, so please check carefully). If you are purchasing individual shares/stocks you will need to go through a broker (e.g. Commsec, SelfWealth and many more)
ETFs & Managed Funds - If it's too hard to decide on a single company, you can always invest in an industry or top 10-500 companies that are "performing" well. This is great if you want to diversify your portfolio as they consist of many different assets. (Note: ETFs and Managed Funds are not the same and will be covered in my blog next week)
Real Estate - If you're in a position where you have a lot of capital, then getting into the real estate market is a great investment option. Overall the market has consistently shown to appreciate in value and provide consistent cash flow. Now this obviously isn't for everyone as it requires A LOT of money to get in. For those looking to purchase a home/investment property and not sure how much money you'll need, check out: how much money do you really need to purchase a house and the hidden fees when purchasing a home.
Cryptocurrency - If you have the ability to be more risky with your investments then purchasing cryptocurrencies could be the right investment for you. It has a low barrier to enter into the market as you don't need to purchase an "entire coin" but can own part of a coin and thus only needing to invest in however much you prefer. (Note: It is a very volatile market and I do not recommend anyone investing their entire life savings on it)

The above list are only a few of the many investment options out there (E.g. NFTs, Fixed Interest Assets, Bonds, etc). So before selecting an investment option, make sure that you:

Do your research - Know how much you can afford, understand the pros and cons of the investment products and does it meet your financial goals
Know your risk profile - Think about how much risk you're willing to take as each strategy and option have varying levels of risks involved
Speak to an advisor - If you're still unsure, it might be best to speak to a financial adviser and get some professional advice.