Summary: Never learned the basics of personal finance in school? Have no fear Worthy is here to help! We're breaking down the basic ins and outs of what exactly investing is, areas for exploration, and why it may be a "worthy" part of your journey to financial freedom.
If you’re like me, you made it all the way through college and well into adulthood without ever taking a class on personal finance. It doesn’t matter if money is on your mind when you are busy with work, school, or reveling in the joys of parenthood, you don’t always have the free time you need to familiarize yourself with the best ways to grow, save, or borrow -- even if you wanted to.
If that’s the case, I’ve got some good news – we’ve done the work so you don’t have to!
Today we we're talking about investing.
If you’ve ever heard the phrase “buy low, sell high” then you are familiar with the basics of investing! The goal with investment is to make money by buying something at a low price and selling it at a higher price than what you paid for it. Investing is typically a way to grow wealth, usually over a long period of time.
There are two main goals of investing:
Make money by selling your assets (for example, stocks, real estate, art, etc.) when they increase enough in value.
Make money through assets by holding on to them instead of selling them. This is often done by purchasing bonds, or stocks that pay dividends (because dividends are paid quarterly to shareholders, the longer you hold on to that asset the more money you have the chance to make), and of course real estate as well (for example, collecting rental income on a property you own).
Investing is generally regarded as the best way to grow wealth. There is a popular phrase in the finance world known as the “rate of return”. The rate of return measures the amount of money you have gained or lost over time. Investing gives you the highest rate of return. It allows you to generate a much higher return than what you would make from keeping all your money in a savings account at the bank.
Did you know? Keeping your money in savings means you lose money every year? Often (like now!) savings rates don’t cover the cost of annual inflation (inflation is the rise in the price of goods and services over time, therefore reducing the purchase power of your money).
Both public and private companies sell their stock to raise money to fund their operations. When you buy stocks, you are buying an ownership piece of the company, which in turn gives you a portion of the company’s profits (or losses).
Average annual stock market return over the last fifty years: 10%
Bonds are a way for companies (or governments) to borrow money. When you buy a bond, you are essentially giving a loan to the company (or government) which they will pay back with interest. Most bond payments are “fixed” and pay a set amount to you over time so they are more predictable than stocks which can go up or down in value. Bonds are different from stocks because you don’t own a portion of the company, which means you won’t benefit from their gains, but you won’t be hurt by their losses either, as long as they remain current on their loan payments.
Average Annual Bond Return: 5-6%
Investments in agriculture, energy, and metals usually through purchasing of a type of stock derivative called “futures” and “options.” This investment type is a bit more complicated for a first-time investor.
You can invest in real estate by buying a home, building, or land either directly or through an investment vehicle such as a Real Estate Investment Trust (REIT).
Of course, here at Worthy we're fans of private market and alternative investments – particularly those that have a social impact such as investing in young, growing private companies or sustainable energy as it is important to have a diverse investment portfolio.
Yes, investing comes with risks. Stock markets can be volatile or governments and corporations can default on their debts, so there's a potential for you to lose money on your investments. In addition, investing can require you to know more about finance, asset classes, and the market than you may already know
The best strategy for investing is to:
The earlier you start investing the longer you have to grow your wealth
Invest for as long as you can
Same logic as #1, longer investments have more time to grow wealth.
Invest in different assets
A.K.A. “diversification” and is a way to lower your risk of losing money as you invest across different asset classes that don’t move in the same direction (for example when bond rates rise, stocks usually go down).
Do you have more questions? Do you have topics of interest you'd like us to cover? Drop a comment or hit us up via the live chat tool on the bottom right of this website and let us know!