Ok, you are reading, so I can already see the dollar signs in your eyes! Investing, in principle, is really quite simple. Build assets which put money in your pocket. Investing well means reaching a stage where such revenue is a significant part of the money that ends up in your pocket. Here’s three simple steps:
Step 1: Learn to tell the difference between Assets and Liabilities
Financial independence is achieved when your passive revenue (investments) make more money than you can possibly do through active revenue (employment, benefits, commission and other sources of income for time expenditure).
So what is hard about it? Like eating fast food, staying up late and not getting enough exercise, most of us slip into bad financial habits long before we think about investment. Some basic accounting terms help here:
Asset: something you acquire or own a part of that sticks money in your pocket regularly
Liability: something that makes you swear each time it drains money from your pocket regularly!
Revenue: Stream of predicted income from any source
Expense: Something that wipes the smile off your income!
Now, most people don’t get this, which is why your average Joe has to go to work each day but one man’s asset is another’s liability. Some examples:
Stocks in companies: Asset to you (dividends), Liability to company (effectively borrowed cash)
Your Home (with a mortgage): Asset to bank, Liability to Home owner (interest payments, taxes, repairs and so forth)
Step 2: Clear Dumb Debt!
Getting started in investing is usually not as exciting as fronting up to Merrill-Lynch to open a $10 000 stock portfolio, instead, a smarter way to start is to find ways to stop being someone else’s asset! In other words, every dollar you owe to someone else holds you back. Every racked up store card on 15% interest can be just as much an investment by clearing the balance and stopping the income flow to someone else, through that interest.
A simple way to consolidate is to check all your regular income and compare it to all your monthly expenses. If there is money left over, you are in front already, simply start putting it into the debt with the highest interest rate first and work your way down the list. If you are leaking cash, again, trim expenses to loosen up cash and attack the one with the highest debt first, even if those higher on the list scream blue murder, just send a percentage of what you owe them (most companies can’t legally act if you are making some regular payments). When the first debt is cleared, pour it into the second and keep going.
Step 3: Buy Assets. Lot’s of them!
In most cases, clearing debt will give the greatest immediate and reliable return than any formal investment tools. When you are down to perhaps a mortgage and a manageable car loan, you are in business! From here, the trick is to find things which will reliably make you money. For all the fancy colored brochures, most assets are essentially one of three types: money, property or shares in companies. Each has advantages, though most financial advisors recommend something in each as a smart strategy.
Shares and Property have the key advantage of being more likely to generate big gains (and also big losses) and people will lend money to allow you to invest in it. This is “good debt” when the returns more than cover the cost of borrowing.
Thus, a smallish cash deposit can often get you an investment property that can generate rental income or a modest stock portfolio. Over the long term, prudent investment in these will make more than you will at work. Once you have this behind you, the best investment remains your own well-planned and well-run enterprise. Most multimillionnairres are large business owners.
So where do you get good advice? I don’t talk to financial advisers. Why take investment advice from someone who still obviously needs to work to support themselves? I look for people who own property or big businesses. Talk to your landlord, find an owner of a large and successful business in your town and tell them you admire them so much you’d love to buy them lunch and take notes if that is OK. Ninety nine percent will be flattered and it’s cheaper than any commission!
Your first investment could be right here, on Helium. Your time here could make you returns long after you turn the computer off! Happy investing!