Investing is most definitely the interesting part of personal finance. Budgeting can be a grind, and insurance is a necessity, but hardly full of fun and high jinks. But investing is where you get to see your money grow and move and change, and eventually you’ll build something which will enable you to live how you want to live.
Getting started on that process is exciting, but before we get into that, you need to understand why you should invest, and how you know you’re ready to take that first step.
Investing is the Only Way to Build Wealth
No-one gets rich by keeping money in the bank. Maybe, back when interest rates were 5%, 6% or even higher, it might have made sense then to ‘invest’ by keeping money in the bank, but since 2008, the perpetually low interest rates mean that your money certainly isn’t going to grow if you leave it in the bank. It’s important to understand the difference between saving and investing – they are very different things.
Saving is money kept in the bank, investing involves converting that money into real assets. Saving is short-term, figure on less than three years, whereas investing is a medium to long-term game, from at least three years but as long as 30, 40 or even 50 years.
Saving is about earning interest; investing is about getting ‘real return.’ Interest is where the bank pays you to make use of your money while you leave it with them. Whereas, when you invest, you have the chance (depending on what you invest into) of getting both an income, such as interest, dividends or rent, and also have the actual value of the assets you buy increase in value also.
Saving is risk-free, or as near as dammit, whereas any kind of investing involves a greater or lesser level of risk. Risk is a multi-layered thing and much more nuanced than you might think. It’s not a case of it being 100% or the risk of losing everything. There’s a whole load of shades of grey between that. Investing is as different from saving as night is from day, and investing is the only way to build wealth.
Signs That You’re Ready
How do you know when you’re ready to begin investing? Well, once you’ve got rid of bad debt and have an emergency fund in place, and the only things you’re paying are a mortgage and student loan, then it’s a good time.
When you realise that you have disposable income, or a lump sum of money that you don’t have an immediate need for, that’s a sign, too. Maybe you’re on the home straight with your debt payoff and trying to build some knowledge so that you can hit the ground running with your investing when you’re done – these are all good signs.
It may be that you’re already investing, most likely through a workplace pension, even if you haven’t yet paid off all your debt, so concentrate the advice in these blogs on that.