With investment, your capital is at risk.
Investing and saving are different. Saving is when you leave money in a savings account to buy a new T.V., spend on your holidays or just to ‘save up’ for a while. When you invest, you go in with the idea that you can make more money than you put in. You buy something with the hope that it will go up in value over time, so that when you sell it, you’ll have more money than you started with.
What can I invest in?
You can invest in pretty much anything – from rare books and 19th century whisky, to property and gold – to name a few! The most common way to invest is buying shares, bonds or funds on the stock market. Investing is not a ‘get rich quick’ scheme; it’s a longer term option for your money.
Is investing risky?
It’s true that there are risks with investing that you won’t get with saving. With investing, you could wake up one morning and your investments could be worth less than they were the day before, whereas your savings should usually either stay the same, or increase with any interest. Bad investments can mean you lose a lot of money, but good ones can mean entirely the opposite. Warren Buffett – the investment world’s Sir David Attenborough – once said that risk comes from not knowing what you’re doing. While investing comes with its own risks, there is plenty of truth in the statement. It’s important to know where you are putting your money and how this company/industry/etc. works. There’s plenty of research around for you to read, and the purpose of these lessons is to help you become a successful investor.
Why would I want to invest?
Investing is about potentially making money for the future. Historically, money invested in stocks has fared better than money in cash savings accounts – with most cash accounts not even beating inflation.
Five reasons to invest
A popular reason to invest is to make enough money to get on the property ladder, which seems to get more wobbly every year.
The ‘side hustle’
With your money stashed away in good investments, you’ll feel good knowing your money is out there working hard for your future plans.
More choices for the future
You might want to open a business one day or finally do a job you love, such as painting or becoming a waterslide tester (real job – Google it). If you have enough money, you can do this without having to worry about being paid much or even at all.
Money to live on when you’re no longer working
It might seem like a world away, but having enough money to have the retirement you want means putting money into a pension as soon as you can.
Money for sooner rather than later
The money could be for sooner than decades away. Investing should be seen as a long-term choice, with five years being a safe ‘minimum’ length of time. Five years of investing leaves your money in the stock market long enough to hopefully make a gain and recover from any potential losses.
Hesitant to invest?
There is a degree of risk that comes with investing – you could lose a lot of money if you get it wrong. But some volatility – rises and falls – in the stock market is normal and doesn’t mean you will lose all your money. So far stock markets have always recovered from downfalls eventually.
There is also a (false) belief that you have to be rich to invest. It pays to put as much as possible into your investment account, whether that’s a small or large amount. Plus, sometimes you can’t afford as much as other times, and that’s fine. Paying in even small amounts makes a difference to the end result because of compounding.
Compounding – which Einstein supposedly referred to as the 8th Wonder of the World – is a bit like your money taking on a life of its own and going out to work for you to make even more money. Putting regular amounts of money into your investment account has a massive effect on the outcome. And the longer your money is invested, the more you can make.
You can find out more about compounding in the lesson dedicated especially to the topic!
Before you get started investing
It’s important to have enough money to have an emergency stash of cash for anything life throws at you too, for example, your washing machine breaking as soon as you get back from a sweltering 3 week trip to the Bahamas. Plus, any urgent debts that you need to pay off need to be covered for reasons that don’t need explaining.