Welcome to Simple Investing 101 with Saving For More! Whether you are thinking about investing or have already started investing, you won’t regret reading this 3-minute article. If you are looking to have your money grow money, investing is definitely better than saving!
What is Investing and Investment?
Investing means putting your money to work in a financial product or real estate project in the hopes of making more money in return. It can be passive income (like rental or dividend income), or making a profit when selling the assets for a higher price.
When Should I Start Investing?
You should start as early as you can so your investment can have more time to grow. The more time it has to grow, the more valuable your assets will become.
For example, if you start investing $100 per month at a rate of 7% return (around the average return in the stock market) per year, you would have $262,481 after 40 years. If you invest $500, it jumps up to $1,312,406 after 40 years.
The key is to be consistent.
How Should I Invest?
There are so many different ways to invest, you can literally write thousands of books on this topic alone. We’ll attempt to cover some of the ways that can give you the best returns over time.
- Contribute to Your 401k or IRA – If you have a full time job and your employer does matching 401k or IRA matching, max out their matching contributions. If your employer will contribute 50% for every dollar up to 6% contribution, make sure you contribute at least 6% of your salary to your retirement portfolio; because that is literally FREE money they are giving you.
Some financial experts recommend trying to max out your 401K or IRA for the first 2-3 years when you start working, this will give a nice boost to the retirement portfolio for years to grow. You can scale back after the initial boost of investments
The good thing about retirement contributions is you don’t have to pay taxes on them. The contributions are taken out first and then you are taxed on the rest of your income.
For more on 401k, check out our other article here.
If you are making contributions to ROTH IRA, then you are a tax on the contribution now and you don’t have to pay tax on it when you are taking the money out later.
- Invest in Mutual Funds – What are mutual funds? Investopedia defines mutual fund as a type of financial vehicle made up of a pool of money collected from many investors to invest in securities like stocks, bonds, money market instruments, and other assets. Mutual funds are operated by professional money managers, who allocate the fund’s assets and attempt to produce capital gains or income for the fund’s investors.
Mutual funds are typically considered low-risk to low moderate-risk investments with good returns over time. Typical returns range from 7-10% per year depending on the market condition and the funds chosen.
- Invest in SMA (separately managed account) – What is SMA? SMA is a portfolio of assets (usually individual stocks) investment firm. Since the portfolio assets are all stocks, the day to day volatility of the assets tends to be a little higher. But the return on investment in the long run is likely higher than mutual funds and some of the other more safe investments.
This type of investment is great if you have a decent amount of cash you want to invest and are not close to retirement. The downside of this type of investment is that it typically requires $50,000 to a $100,000 minimum to start this type of account depending on the investment firm.
On a personal note, I have two SMA accounts with two different investment firms and they have been giving me around 20% returns per year in the last two years. So I highly recommend it if you have a decent amount of money lying around and can stomach the risks.
- Invest in Real Estate – There are a number of ways you can invest real estates. You can buy a house, remodel it and then sell it (which is known as flipping houses), or you can buy a rental property and rent it out.
Each type of way of investing comes with its own set of risks and requires a different set of skills and amount of work to make it work. The ROI (return on investment) for each type will also be different.
For flipping houses, if you don’t have enough capital to buy the houses yourself, most people typically take out hard money loans (short-term loans typically for around 12 months terms) to finance the purchase and remodeling of the house. The returns on flipping houses can range from 30% to as much as 80%, depending on the areas, the purchase price of the house, the cost to remodel the house, and how much the house is sold for.
For rental properties, it’s possible to get traditional 30 years mortgages to finance the purchase, though the interest rate for rental properties is higher than for a primary residence. Typically most people look for a capitalization rate of between 5-10% per year.
What is the cap rate? The cap rate is the expected return in a real estate investment property. It is calculate by using (net income – net expense) / value of the property = cap rate %. Do note that, the cap rate is just one way to measure if the property is a good investment property or not. There are various other variables to consider when investing in a rental property.
- Invest in Crowdfunding – What is crowdfunding? Crowdfunding is the idea of pulling small amounts of capitals together to fund a larger business venture. You can crowdfund for peer to peer lending and real estate.
Peer to Peer Lending is the idea of you playing the role of the bank and lend to people who are looking for loans. The rate of return can range from around 4% all the way up to 30% or so with a variety of risks, the higher the return the higher the risk. The typical default rate on this type of loan is estimated to be around 4%.
Crowdfunding for real estate again can vary. Some platform offers flipping houses and thus gets you a return in as little as 9-12 months. Some platforms invest in rental properties and thus can take between 5-10 years to get your initial return back. Typically return on this type of investment varies. Some platforms report around 10% ROI (return on investment).
***Disclaimer, we are not a financial advisor and these articles are only used for educational purposes. You should consult with a financial advisor for professional advice.
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