As your career starts to take off, you’ll probably find that you begin to have some spare cash and whilst it is always tempting to upgrade your car or take a trip down to the mall, you may want to consider investing for the future.
Having a stack put by means that you have flexibility in the future. Whether you want to buy property or start a business, it’s handy to have cash at hand.
So here are 7 real-life investing tips that will get you off to a good start with your saving strategy.
7. Pay down your debts first
The first tip is not really about investing directly, but it is more about your overall financial health. Because the very first thing you need to do before you even think about investing is to pay down your expensive debts.
The premise is simple; it doesn’t make sense to invest cash somewhere you’ll be earning a 5% annual interest when you have a credit card debt that is costing you 27% a year!
There’s a balance here, however. You have to think about what you are getting versus what you are paying.
Interest rates for both savers and borrowers are at an all time low at the moment, so if you have a source of borrowing that is incredibly cheap and you can make more by investing, then you are better off keeping the debt. But see the section on risk/reward below.
You also need to consider your credit score, especially if you don’t have much of a track record.
Some lenders prefer to see loans that have run to term rather than ones that are paid off early. Crazy as it may seem, it is sometimes better to run your loan to term to prove that you can stick to an agreement and build up a long-term pattern of payments rather than paying off quickly.
Paying down your debts does have a significant side benefit apart from financial health in that you start to feel a lot happier when you aren’t burdened with borrowing.
6. Understand risk/reward
Debt and investments are priced based on their risk/reward ratio.
For example, if you invest in your friend’s new Fintech startup that they are running in their mom’s basement, you may find that you have bought early shares in the next Apple and if you did that, you’d be a billionaire in the next few years.
But you are far more likely to have bought into a dog and lose all of your money. Put simply, the more risky an investment, the more likely you are to lose.
Very safe places to put your money like government bonds are almost 100% certain to pay off and you are highly unlikely to ever lose money, but the returns will be miniscule as a result.
So whilst it is important to understand the risk of a particular investment, it is also important to understand your personal attitude to risk.
Would you feel comfortable putting all of your spare cash into your friend’s new Apple in the hope of a big payout, or do you prefer the certainty of a government bond?
Most people sit somewhere in the middle and understanding where you are on the risk/reward scale is important as you begin your investing career.
5. Split your savings in three
So once you have paid down your debt, you need to think about where you are going to put your cash.
The best tip here is to split your money into three sections: short-, medium- and long-term.
The short-term money is for those unexpected expenses that crop up from time to time. When your car needs repairs or you have to get the washing machine fixed you need to have a pot of cash that you can dip into.
Most experts suggest having a buffer of three month’s worth of living expenses and this makes complete sense in a time of COVID, when we don’t know what is going to happen to the jobs market in the future.
Your short-term money needs to be accessible, so make sure it’s somewhere you can withdraw it with no penalties.
Your medium term money is the cash that you put by for larger things that are some distance away. You could decide to put money aside for a house deposit, for example.
In this case, your investment strategy can be a little more ambitious because although you may lose money short-term, in the medium term you should come out ahead. Stocks are a good option here.
Everyone needs to have a long-term pot of money. This is the cash you are putting by for your retirement. Don’t neglect this step because if you aren’t careful, you could find yourself retiring with no money to keep yourself.
The good news is that because this is a long-term investment, you don’t have to put as much money aside on a monthly basis. Little and often is the way forward here. Pensions are probably the most common example.
When you have your three pots of cash, the key is not to put them all in the same place.
Make sure that you have your money split across a variety of different investment sectors to reduce your risk.
All smart investors in every arena diversify their portfolios and you should, too.
3. Embrace a long-term planning
Even though we have mentioned short- and medium-term savings, what we are talking about is a long-term financial health strategy.
The idea is to get yourself into a mindset that promotes saving and investing rather than a cycle of short-termism where you are always trying to catch up.
2. Investing can become a side hustle
Investing doesn’t have to be boring and it is true that you can have a little fun with your money, as long as you have understood risk and have a diversified portfolio.
Some people even find that it turns into a useful side hustle or even a full-time job once they get sufficient experience.
For example, day trading has proved to be a very lucrative sideline for many people and as long as you are prepared to put in the effort, there are significant rewards available. Day trading for beginners can seem overwhelming at first, but there are some excellent resources out there to help people understand the market and how to make money.
1. If it sounds too good to be true
There’s one really important real-life investment lesson that everyone should pay attention to.
If it seems too good to be true, then it probably is!
Don’t get hooked into dodgy pyramid schemes or unlikely investment scenarios.
Make sure you do your research and that the people you are thinking of putting your money with are being honest.
If you find that your potential investment partners explain the risks and that there are some sacrifices you have to make along the way, then that is a good sign that the investment is a genuine one.
If they are being promised red Ferraris and Sunseeker yachts from day one, then beware!