Investing is an important activity to take good care of your future self, but what does it mean? What does investing mean, what do you do in practice when you start investing and why is it smart? In this article, we want to inform you about investing and why we believe it is crucial in the journey to financial independence.
What is investing?
An investment is a form of investment in which money is committed for a longer or shorter period of time for the purpose of future financial gain. Investing can be done in several ways. You can invest in the stock market, in stocks, bonds or ETFs. You can also invest in real estate. Or in cryptos. Or in gold. It’s about diverting your money to something, assuming that your money is going to be worth more.
Want to read a little more about the basics of investing? You can do that here!
Why should I invest?
First, you don’t have to do anything. Especially not when it comes to your money. It may be smart to start investing – if you have your financial basics in order, such as a savings pot and enough money to make ends meet each month – to put your money to work before you.
When you invest your money, you do so to make a return. Return is profit that you make. Suppose you buy shares of company X for €100. Company X is doing well and the company is growing in terms of sales and profits. That means that this company is attractive and other people would also like to be co-owners. In other words, also want shares of company X. There is more demand and more value going into this company, so the price per share has risen to €110. That means that without any action on your part, your deposit has increased by €10.
Investing versus speculating
Anno now, investing is very popular. However, people often confuse “speculating” for investing. Investing is essentially a lot more boring than speculating. With investing, you invest your money, primarily wanting to minimize risk and make long-term money work for you.
Speculating means occasionally taking a gamble and hoping to make some quick money in the short term. Remember, however, that anyone who has once made a lot of money in a short time with speculation is on the barricade with this, but anyone who has lost a large portion of their money with it you do not hear. At elfin, we would urge you not to let your emotion take over, not to go along with hype with money you can’t afford to lose, but to focus primarily on long-term gains.
The risks
Investing is not without risks. It is important to realize that. But the word “risk” often scares people, and there’s no need to! You can invest in a way that minimizes your risk as much as possible. To minimize risk, it is wise to gain knowledge before you begin. Knowledge around the basic concepts in investing, knowledge how to minimize risk and knowledge how to make sure you make money for the long term. The most important investment rule of all is: do not lose money! And this sounds like an in header, but in a Cruijfian way: you’re not going to see it until you see it through.
Why is investing important?
Very briefly, the idea behind becoming “financially independent” is to create as large a gap as possible between income and expenses, invest a large portion of your income, thus build wealth, and eventually live off the return on your wealth. This is why investing is so crucial: if you have invested your money in widely diversified index funds, you can assume – from historical returns – about 8% returns per year. If you only save your money you get 0% interest on it these days. Your savings do not provide you with new money, and this is what investing does. So investing is important for 2 reasons within our journey to financial independence:
- you end up needing less of your own deposit to reach your final goal. This is because through the interest-on-interest effect, you are investing your required capital together;
- you ultimately want to live off the return on your assets, and you can only do that if you have invested your money.
How do you begin?
Makes sense, right? But how do you start investing? And where do you start? If you’ve already looked into investing a bit, surfing around the Internet a bit, you may well feel overwhelmed by the wealth of information out there. There are diehard crypto investors who advertise and try to convince you that this is the way to make money fast. You have real estate fanatics who bought 10 properties within a year and tell you that you can do the same. You have the day traders who make thousands of dollars every day.
And you have us: boring as your grandmother’s outfit, telling you that investing is mostly a boring, long journey, where you have to do the same trick every month: put a little money in widely spread investment products, leave your emotions at home and be patient. Anyway, that’s how it works. Investing is a matter of long breath, nerves of steel and keeping focus every month. No quick fat nods. Slow & steady.
Tips for starting to invest
If you would like to start investing, putting your money to work before you, these are good tips to take away:
- Read up and delve deeper. For example, read this e-book which gives an introduction to the world of investing in easy language.
- Start with small amounts. This will increase your confidence and allow you to practice without risking too much. Read this article about starting to invest with small amounts.
- First, make sure you have a good savings buffer. Read why this is incredibly important and how to build it here.
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