How to make your money work for you?
Simple: learn how to invest.
So how to start investing?
This is your quick go-to guide in five steps.
Four steps are easy, while one is harder. No worries, we are here to help.
How much to invest
Understanding how much money to invest is an absolute requirement to avoid mistakes, such as risking too much or choosing the wrong risks.
Here is the first rule: do not invest more than you can afford to lose. If bigger investments generate higher returns, by the same logic so do bigger losses.
The amount you can invest depends on:
* your income
* your living costs
* your savings
A good rule of thumb is to:
(a) calculate 6/9 months of your current living costs,
(b) take that amount money away from your savings and deposit it into an emergency fund (cash),
(c) take the rest of your savings and invest them.
Example:
annual income $ 70,000
living costs $3500/month (=$31,500 over 9 months)
savings $55,000
available to invest: $55,000 - $31,500 = $23,500
Energy & focus
Managing your investments requires an effort on a regular basis.
If it is true that the bigger and more diverse your investment portfolio is, the more opportunities there are to grow your money, but also the need for monitoring and eventually moving things around. So it is key to think about how much time and energy you're willing to dedicate to investing.
You have two options: do or delegate.
=> DO - you learn your stuff in full, then go build and run your diversified investment portfolio.
Yes you are in charge. But it will take a good chunk of your time.
=> DELEGATE - ask someone else to manage your money.
You will find good or bad advice. We have a full article dedicated to this topic, coming up here.
If you decide to delegate, here at Monetharia we are building a new way to dynamically manage your money in investment portfolios adapting to all market conditions.
Goals
Setting investment goals can help you know what your money is working for and can help you achieve your long-term financial goals. It empowers you (or who manages money on your behalf) to see how well you're doing, and if you need to make changes to your investments.
Examples can be setting money aside for retirement, or pay for college tuition for your kids, or buy a new car.
This is some work that you have to do on your own. If you have no specific objective in mind, just work towards building up your savings over time.
Risk profile
Investing comes with risk.
Before you invest, you need to make sure you are comfortable with the level of risk involved: remember that you have to invest only what you can afford to lose.
From risk-averse to moderate to risk-taker, your risk profile will fundamentally determine the shape of your investment portfolio (i.e. how much equities vs bonds vs cryptos vs other asset classes you might tolerate).
Here's an article coming up on defining your risk profile.
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The introductory work of a good investment advisor would probably finish with the previous step. It is good enough for a quick start.
But we believe one important step is missing. Keep reading.
***
The economic cycle
For sounder investing, there's a fifth fundamental step to take in account - it is the closest to our heart and the most overlooked (it's hard to do).
Given that the economic cycle changes over time, and so do markets, you should understand what macro environment we live in at any given time. It is - we believe - the only way to build, or change, your investment portfolio with the right shape for the ongoing market conditions.
For example, what was working in 2021 did not work in 2022 with rampant inflation. You get the point?
If you are neither a macro expert nor an investment professional, here's the time to think if you should start dong your own research or delegate the task to experts.
Here on the Panorama, you will find bi-weekly short market updates (free), and weekly professional investment notes (subscription) here. Better yet, the innovative and dynamic investment vehicle we are building automatically read macroeconomic and market conditions subject to where we are in the economic cycle , which is a game changer in the investment industry.
Congratulations for making it so far.
Move to the next article: what financial instruments you can use to invest.
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Suggested books on the fundamentals of investing
via Amazon.es
Educacion financiera avanzada partiendo de cero
via Amazon.com
The little book of common sense investing
All pictures are sourced via pexels, unsplash or freepik
