Why Investing - Investing Tips For Beginners


In this article, I'm going to show you the reason why you should start investing. But for better understanding, I'm going to write this article base on someone name Bob.

Meet Bob. Bob just graduated from college and got his first job at Corporate Co. After a month of hard work, Bob has just received his first paycheck. He's very excited. Bob plans to spend 50% of that on rent and utilities, and another 30% of it on food and fun activities, like going to the movies.

As for the last 20%, Bob wants to do something with it, maybe even invest it, but isn't sure where to start. So Bob decides to deposit it into a bank account. Bob thinks this is a safe plan. After all, the bank will actually pay him a small amount of money each year, called interest, just for keeping his money at the bank. This sounds great, there's just one problem.

Read: How To Start Investing in Your 30s

Bob may actually be losing money. Bob is flabbergasted. How can that be? Well, it comes down to something called inflation. Inflation is simply the idea that prices for goods and services rise over time.

Why inflation occurs is beyond the scope of this article, why your grandparents are cranky for a reason: in the 1950's you could actually buy a loaf of bread for 12 cents and a new house for $10,000.

Inflation in the U.S. is targeted to around 2% a year. This is bad for Bob. That's because even though the bank may pay Bob 1% of his deposit, prices have actually increased by 2%. 

So what should Bob do?

Well, in order to actually make money, Bob needs to invest in something that will beat inflation.

Generally speaking, only 3 things do: 
  1. Bonds
  2. Real Estate
  3. Stocks

1. Bonds

Let's start with bonds. Bonds are loans made to corporations or governments. In return for your money, called principal, you will receive a fixed amount of interest per year, plus your money back once the bond expires.

Because of this guarantee, bonds are the safest of the 3 investments, though this safety comes with a cost: They have the lowest potential investment return in the long-run.


2. Real Estate

This is property purchased to make money, generally by renting it out. While this is quite difficult for the average investor to do on his own, Bob could instead invest in a REIT, which is a professionally managed real estate portfolio.

3. Stocks

Stocks are simple: They represent a piece of ownership in a company like Apple or Google. People buy and sell little pieces of these companies, called shares, in places called stock exchanges. When Bob buys a share of say, Apple, he becomes a partial owner.
  • When Apple does well, the share price goes up and Bob makes money. When Apple does poorly, the share prices goes down and Bob loses his money.
These fluctuations can make the stock risky. However, fortunately for Bob, stocks in the United State return on average about 9% a year, including both share prices appreciation and dividends, which are cash payments made to each shareholder when the company does well.

Thus, if Bob invests the remaining 20% of his paychecks, say $100, he can beat inflation by almost 7% each year! But that's not all! Here comes the real magic.
Principal  - Profit$100 + $100 x 9% = $100 + $9
The next year, Bob will not only earn another 9% on his initial $100 investment, called the principal, but also an additional 9% on the $9 dollars in profit from the previous year.
$109 + $109 x 9% = $119
Earning money on both your principal and profit is called compounding, and the magic is undeniable. 

Start investing early enough, and your portfolio will be like a snowball rolling down a hill, outstripping even those who put in much more but start later.

Hopefully, you and Bob now understand why it's important to invest your money.

Author:

Hi, i am Micheal, the guy behind Roadtosuccesse. I share tips and tricks to help take a business to the next level, show which systems I personally endorse and use, share what I learn as a student of the game, and help people with personal development so that they can reach their full potential.

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