Investing can sound more complicated than it needs to be. Essentially, you're just trying to invest a sum of money that can grow over time. But it's easy to find yourself in a web of confusion if you've never been exposed to the basics of how it all works.
That's why investing should be a core concept taught in schools. It's one of the greatest wealth-builders of all time, allowing people to obtain financial security and provide for future generations.
Since we're in back-to-school mode, I've rounded up some important investing lessons I wish I had been privy to before I jumped into the stock market.
1. Master the concept of saving
Learning how to save is an important money lesson that will serve you well throughout your life journey.
Think about it: If you don't have any savings, it's hard to invest -- unless you stumble upon a windfall of money.
Saving may sound like a simple concept, but there's a lot more to it than meets the eye. It's a crucial step that teaches discipline, consistency, and strategy.
But you can't stop there. Saving is not a final destination; it's a means to invest and allow your money to work for you. Saving consistently will prepare you for strategies like dollar-cost averaging, an investing approach that allows you to take advantage of fluctuations in a stock's price by investing small amounts at regular intervals. Thanks to this strategy, you don't have to risk losing all your money by dumping your entire savings portfolio into the market at once.
So when it comes to savings, start where you are and consider increasing your savings rate as you earn more money or decrease your expenses. Then, make sure you invest your money so you can combat the woes of inflation and grow your money over time.
2. Become a student of the stock market
Before you invest, you should understand how the stock market works. In simplest terms, the stock market is a place where buyers can shop for a variety of stocks and other assets. The price of assets constantly changes based on a variety of factors, including demand, market conditions, earnings, and news.
When you purchase a stock, you are buying a portion of the company's future profits. Therefore, you want to do your research and understand how the companies on your wish list earn money. Then, study the sectors of the stock market that your companies fall under and learn market trends.
Of course, you won't be able to learn everything you need to know about the stock market in a few classes, but it helps to have a basic understanding of how it works so that investing won't be seen as an esoteric concept reserved for the wealthy.
3. Tap into the power of compound interest
If there's anything that can get you jazzed up about investing, it's the power of compound interest. There's nothing like watching your money multiply and produce more money while you sleep.
Even renowned mathematician Albert Einstein was a fan of compound interest. He often gets credit for saying, "Compound interest is the eighth wonder of the world. He who understands it, earns it; he who doesn't, pays it."
Imagine this: You start with a $1,200 investment that earns a 9% rate of return. If you don't contribute another penny to your investment portfolio ever, your $1,200 could turn into a little over $37,000 after 40 years. Now, if you're saving $1,200 annually, the power of compound interest kicks in exponentially and boosts your portfolio to almost half a million dollars after 40 years.
That's compound interest in action. Even if you're not a math wizard, getting your hands on three inputs will allow you to calculate your growth potential: Investment amount, rate of return, and time horizon.
Investing is a life-long journey
Although I didn't learn these lessons in school, that doesn't mean I can't be a successful investor and achieve my financial goals.
Getting into the game of investing is not about being an expert in every topic in the market or having a wad of cash at your disposal. You can start with a percentage of money from your next paycheck and invest in companies you are already familiar with. Then, add more items to your investing repertoire such as portfolio management, diversification, tax basics, valuation, and so on.
The most important lesson I wish I would have learned is to start investing consistently. It's not about perfection; it's more about progress. Be willing to fail fast and grow exponentially so you can unlock one of the simplest ways to accumulate wealth without lifting a finger.