Many of you have probably seen the chart showing how much money you can make from compounding interest. I first saw it when I was in high school and my initial thoughts were “Wow that’s a lot of money!” and “How is it possible to get 12% return?” If you don’t know what chart I’m talking about then I will list an example below. This shows the incredible power of compounding interest.
If you invested $2,000 a year for only 8 years, this is the return you could expect at different lengths of time.
When I began trying to get a grasp on the concept of investing I was a little overwhelmed with the sheer volume of information on the subject. Not only that, but there are a seemingly infinite amount of philosophies out there. So my goal was to research until I found enough overlap to create a foundation to start building on.
Whether you’re completely new to investing and/or planning your financial future, I highly recommend reading Robert Kyosaki’s book Rich Dad Poor Dad. Before I explain why I think it’s so valuable, I need to address some concerns people have with him in light of the possibility that he was deceptive about facts in his book. There are reports that Robert Kyosaki claimed when he published the book that “rich dad” and “poor dad” were both real people in order to get the book published as nonfiction. While it is not certain either way, to me that doesn’t affect the valuable lessons that book taught me. I don’t ever agree with lying but I understand why he wrote the book this way and think it would have been just as effective if he presented it in this way- the whole book is an analogy for the different mindsets that financially successful people versus the financially unsuccessful. Regardless of what is true, it is full of value.
That aside, this book was massively influential in breaking my paradigm of the way that money works and rebuilding it into a much more accurate understanding. It didn’t teach me everything about how to become financially wealthy but it taught me what I need to learn. It took me from being unconsciously incompetent to in between consciously incompetent and consciously competent. Basically, I didn’t know what I didn’t know. Now I know what I don’t know and what I do know about this subject.
It’s important to have financial literacy before starting down the investment road. That is why I’m glad I read this book before looking further into investing itself. The main lesson from this book is the difference between the two different understandings of assets. Financially successful people see assets as things that bring in money and liabilities as things that cost you money. In most cases, they don’t see a house or a car as an asset. That is because you have to continually pay money into the house via taxes, repair, electricity, water, and so on. If it’s a rental house or if you’re using your car for Uber then that would make them assets.
The reason I bring this up is that taking the time to educate yourself or spending money on learning the skill of investing is an investment in itself that will become an asset to you. Once you understand the process of making money that is an asset you own that no one can take away from you.
I then began learning more about the process of investing. I read another book by Robert Kiyosaki that I would not recommend called “Rich Dad’s Guide to Investing”. It was very long, repetitive, and extremely simplistic. However, most things in life have some good nuggets if you stick with them. So to save you time, I will go over some of the essential lessons and add my take to them.
Before investing, you need to decide what your financial goals are.
Is your goal to be secure, comfortable, or rich?
Whichever one of these 3 you pick as your goal, they are stepping-stones to get to the next ones. If you are content with staying at the security level all your life then perfect. Stick with it. If you want to be more comfortable then great! Becoming secure should be the first mini goal you reach. And if you want to be rich then that’s excellent. You’ll get there after the first two goals.
Now that you know which level you want to be at, you need to define what that level means to you. Here are some examples:
- Secure-enough money to provide food, clothing, shelter, electricity, water, and medical care for the entire family
- Comfortable-enough money to travel, take more time off for family, nicer car, and take vacations
- Rich-enough money to pick jobs based on passion, own a sports car, more time to volunteer, plenty of time with family, and travel the world to experience each culture
Everyone has different priorities and therefore the definition of each of these words will differ. That is unless you have exceptional taste and yours are the exact same as mine. The investment strategies will differ based on what step you are at.
Security level of Investing
The first level, security, is a more conservative investment strategy than the latter 2. This is typically where you would invest in 401ks, IRAs, and mutual funds.
If your employer offers you to match your contribution in a 401k, then take full advantage of that. When they match your investment that is an instant 100% return!
IRAs are great because they have huge tax advantages. Traditional IRAs allow you to invest pre-taxed dollars whereas Roth IRAs do not tax you once you withdraw your investments later on. I do not currently have a Roth IRA with my employer and I was under the impression that I could not open one without it being offered through a job. However, I was wrong. You are required to have an income to open one, but you have the option of opening one yourself.
Factors to consider in finding a brokerage to start your IRA Roth:
- Minimum requirements for investment
- Any additional fees
- Ease of automatic investing
- Customer service support
That’s it! People get lost in opening an account because of all the bells and whistles that are promoted through the competing companies. As Marcus Cicero put it, “More is lost by indecision than wrong decision.” Your financial losses will be exponentially greater if you don’t decide which one to invest in than if you make a decision that has one or two less features. Open one today and your future self with thank you by getting in the time machine you can afford because you started investing early and they will give you a Chick Fil A card (we all know they’ll still be around).
Unsurprisingly, to myself at least, after doing my own investigations on mutual funds, I believe Dave Ramsey nails it with his philosophy. His mutual fund strategy involves diversifying your wealth equally into 4 types of mutual funds.
- Growth and income
- Aggressive growth
Growth– medium or large companies that have more room to grow but are currently popular and not quite as steady as growth and income stocks
Growth and income– large “blue chip” companies that grow at a healthy steady rate such as Coca-Cola, Google, etc.
Aggressive Growth– the most volatile of all the stock options with the most potential for return and loss
International– companies outside the U.S. in case the economy has a bad tank
Dave Ramsey also has a great resource on his website where he offers references to financial advisors that he recommends. I have talked to several of these people and I have never had a bad experience. I don’t know about you, but I have a hard time trusting people with my financial information Dave puts them each through a strenuous vetting process. Talking to them to get to know them is free and I would recommend reaching out to them to see if that would be a good fit for you. If you are interested in that you can follow this link to check it out for yourself. https://www.daveramsey.com/smartvestor
Comfort Level of Investing
Investing in mutual funds is an excellent foundation for your financial future. If you want to take it up a notch it will take a little more time and experience to start creating more wealth in a shorter period of time. This is the step where you begin to pick out individual companies to invest in yourself. If that is something you would be interested in, then here are some things that will serve you well to learn before you start investing.
- Technical financial terms
- How to read financial statements
- Tax laws
- Fundamentals of accounting
- Business law
- Corporate law
A good resource to begin getting exposure to different aspects of that I found useful is https://www.macrotrends.net/stocks/stock-screener
Once you have an understanding of the above concepts, you will want to evaluate the businesses you are considering buying stocks in. To determine if a business is good to invest in use a safety checklist
- Study their financial statements
- Will this investment get me to where I want to go
- Will it continue to make money
A great source with more information on financial sheets and to start the actual investment process is http://tradingview.com.
It’s a one-stop shop platform with all the features you will need to grow your investing knowledge. They have a free basic plan that includes:
- Worldwide market data coverage
- Highly versatile screeners
- 50+ smart drawing tools
- 100k+ technical indicators
- 12 customizable chart types
- Backtesting for trading strategies
Rich Level of Investing
The success you gain from investing in stocks comes from your ability to look from the outside of the business you are investing in, and attempting to understand the inner workings of it. The financial statements you have been studying to make your decisions are indicators of how the company is running and how it plans to succeed. You analyze the company to evaluate the management and what decisions they are going to make. What more accurate and sustainable way to predict the actions of a business than to run it yourself?
By starting your own business, you have multiple avenues you can go down to experience your rich level of investing. You can create the business and build it up to take it public by generating and selling IPOs (Initial Public Offerings) yourself. You could build it up until it is at a stable enough situation to where you could sell the whole business. Or you could continue to run it yourself until it is profitable enough to start taking a salary from it.
This is a slightly simplified explanation… The rich level of investing takes far more work, time, and patience than any of the others. Because it has the most potential for the greatest payoff it therefore requires the most work. Every action creates an equal and opposite reaction.
A major part of being a business owner is investing in yourself. Spending your time and money on training now will generate massive returns in the future. Developing and sharpening your skills by taking classes and finding mentors will cut down on the time it takes to reach your financial goals and open up many more possibilities than you started out with. Investing in yourself is an essential prerequisite to any of these levels of investment, but this stage requires more time and attention devoted to this point than the rest.
Having a profitable business creates a compounding effect on your wealth. Once you start generating a profit, you will be able to start acquiring other assets that generate more assets. You can do this at any other stage, but there are massive tax benefits to having your own corporation purchasing other assets. This is another reason to study the tax laws and business laws from the previous step. This is why the rich get richer and pay less taxes. They understand how to legally utilize the tax laws to their advantage. This will be the most difficult step to reach, but not everyone needs to. It all depends on your priorities.
Any of these levels are perfectly fine to reach and to continue in. The important thing is to decide and stick with your priorities and live by your values. Parting thoughts. The best time to start investing has already passed. The second best time to start investing is now. Take action.
Now you know the principles behind investing, but do you know what your goal really looks like? I have created a free template to create a road map to your goal in 7 minutes and I’m giving it away for FREE!