Everyone hears about making money. However, people rarely think about how to manage it once they get it. How should you save money? When can you start investing it?
What you should know before investing
Investing is a little bit like passive income. It uses your current money to produce more of it.
Here is a popular example to explain it. Would you rather have one million dollars instantly or double a penny every day for a month?
After a month, the penny doubled turns into millions of dollars. When you back up money with good decisions, you create more. We call it investing.
Money is useless until you use it
People invest in the best entertainment stocks because they want to multiply their income. Although it may look like an option in business, it’s not.
Since 1985, inflation has increased slowly but surely. Despite how it looks, do not assume that saving money requires no investment. The more time passes, the less value your savings has.
The minimum objective of investments is to counter inflation. Once you create a positive return, you will save your money and increase it.
Yes, investments are not infallible. Everything has its risks. But when it comes to calculated risks, it’s better to invest money somewhere else. Let it be in the bank and it will disappear regardless of your expenses. Which option sounds smarter?
The habit of investing
You can see how people misuse this tool everyday. On the one hand, you find people who cannot save because of how much they spend. On the other hand, people invest as if it was the holy grail of finance. They usually expect to get rich from opportunities.
Follow these principles to understand how to invest the right way.
Investing is a life habit.
If you cannot invest when having less money today, you never will.
You cannot control the market. You can only adapt to it.
Rich people invest money to keep their wealth, not to create it.
Before you invest
As soon as you get started, you will start hearing about many trends. Some advisors will suggest putting money in one thing. The news will contradict it. Another source will recommend another stock.
Although they may contradict, all of them have some degree of truth. If you don’t want to be overwhelmed with information, use these two strategies.
Shoot first and aim later
In your first investing decision, assign a small amount to any choices you have in front of you. At this point, we don’t have enough knowledge yet.
In fact, nobody can predict the future. Start creating many tiny investments and see what comes out. At first, we need to test as much as we can so that we develop our criteria.
After you get some results, gradually adjust your amounts. Remove the stocks that didn’t work and spend more on the ones that did.
Invest only in things you understand
Take your time to research and create your own opinion. Even if the world takes the contrary direction, you should think individually to control your finances.
Even better, you can see what everyone is doing and question it. After all, only a tiny fraction of investors create wealth. Most people don’t understand what they do and past events have proven it.
When you find a trend in one direction, you may want to study the contrary trend. Don’t do it because of merely being different, but because fewer people have thought about it.
How to get started investing
When you invest in things you know, you can prevent losses. When using large amounts, it takes more effort to recover a loss than making money. That’s why bad investments are time-consuming.
Smart investors understand nobody can predict the future all the time. Despite the noise and emotions, they skip unnecessary risks and calculate their moves.
Use these three questions to make better decisions.
What is the upside and the downside?
What is the opportunity cost of not doing it?
If I’m wrong, how easy is it to undo the consequence?
The bottom line
Finance is a matter of skill and experience. The ones who stay longer usually make the most profits.
In the beginning, you want to be open-minded. Feel free to test many available options. As you gain experience, focus on fewer investments.
Diversify to learn about the market, but build your wealth around one industry. That’s what the richest investors have in common.