We often hear that investment is something only the rich can afford. Other people count on large bonuses from their employers, inheritance or lottery prize. Unfortunately, the reality is harsh, and such ‘solutions’ are too unreliable. Even if you do win in a lottery, you will probably make all the money fly, as you have no experience in finance management.
So if you want to be well-off by the time you grow old, start with little sums of money and develop your own small investment plan.
Step 1: Savings Accounts, Deposit Accounts, Fixed Maturities
If you don’t have a startup budget, you can make it. Start with saving up small amounts of money each month – as much as you can afford, be it $50 or $500. But don’t just put it in a tin box. Place it on deposit.
There are several similar options allowing you to keep the invested money and earn interest at the same time. All of them are highly liquid and risk-free instruments. Your best choice is banks offering recurring deposits with compounding interests.
Although the annual percentage yield will not be high, you will be able to save a certain amount of money (up to a few thousands) that you can use for your next move.
Step 2: Brokerage Account
Now that you have more money, you can open a brokerage account allowing you to invest in a variety of shares. But putting all the money in your favorite company’s shares is too risky, so it’s advisable to invest in index funds.
Indexes are just numbers and one cannot literally make money on them. However, an index represents the performance of a list of companies (their shares, to be precise). So investing in an index fund means actually investing in several firms, thus minimizing the risks. Even if a few companies perform worse, others will perform better.
You can expect a much better interest rate here. In addition to this instrument, you should still keep putting small amounts of money on deposit accounts as you did in step 1. This will result in a dozen of thousands or even two in a year.
Step 3: Stock Market
The next phase of your small investment plan includes building your own securities portfolio and earning residual income. Professionals suggest that beginners invest in 5 or 6 companies. Alternatively, you can invest in bonds which promise less income, but you will know for sure when and how much you will get.
If you also include an index fund into your portfolio, that will mitigate the risks even further. This will increase your capital up to $100.000 and more.
Step 4: Diversifying
Now you can expand your investment activity to a larger variety of assets.
- You can build a more complex securities portfolio;
- You can invest in precious metals to get a ‘safety bag’;
- Invest in real estate, including foreign property such as managed apartments and hotel rooms;
- Put some money into currencies (but be careful with this part).
In other words, diversify your portfolio between different types of assets, different sectors and locations.