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- Investing Basics: Investing is about using your money to buy assets that can generate more money in the future, essentially letting your money work for you.
- Importance of Starting Early: The power of compound interest illustrates that the sooner you start investing, the more your money can grow over time due to the interest-on-interest effect.
- Getting Started in Investing:
- Step 1: Identify your financial goals and the timeframe for achieving them.
- Step 2: Understand your risk tolerance.
- Step 3: Build an emergency fund before investing.
- Step 4: Educate yourself about different investment strategies and asset classes.
- Step 5: Choose the right investment platform or brokerage that aligns with your needs and offers low fees.
- Step 6: Grow your portfolio by learning about other investments and diversifying.
Investing and growing your money is a process that requires a strategy, patience, and an understanding of your financial goals and risk tolerance.
This is a step-by-step guide to help you start investing and growing your money.
What is Investing?
Investing is using your money as capital to buy assets that can produce more money for you in the future.
It’s basically letting your money do the work for you.
Why is it important to start investing now?
The answer is simple:
When it comes to compound interest, it’s not about how much money you’re investing, it’s about how much time you’re allowing that money to grow.
Let’s say that when you were 20 years old, you wanted to save for retirement. You decided to put 500 pesos per month on an account (or an investment) that gives an average annual interest rate of 7%.
At age 60, you retired. And you also stopped the deposits into your savings account.
Here’s what you were able to save in the past 40 years:
|Initial deposit||Php 500|
|Total Monthly deposits||Php 240,000|
|Total Interest||Php 964,798|
|Total Savings||Php 1,205,298|
And to illustrate how crucial the length of time of investment is in compound interest, let’s modify our scenario a bit.
Instead of saving at 20 years old, you started at age 35.
How does a 15-year difference affect your overall savings results?
|Initial deposit||Php 500|
|Total Monthly deposits||Php 150,000|
|Total Interest||Php 231,708|
|Total Savings||Php 382,208|
As you can see, the difference is huge.
As a kicker, even if you tripled your monthly deposits to Php1500 when you started at 35, you still won’t get as much versus if you started 15 years earlier.
The total earnings are still significantly lower compared to the results when you started at 20 years old.
That’s the power of compounding.
The moral of the story?
Start saving and investing early. In time, the value of your interest will be bigger than what you’re putting in. And when that happens, your money will experience exponential growth.
What is Compound Interest?
Compound interest is the resulting interest based on your initial deposit/investment plus the accumulated interest gathered from the number of periods it was compounded (“compounding schedule” — e.g, daily, weekly, monthly, annually, etc.,).
And that’s why it’s also called “Interest on interest”, since it piles on top of both the principal and its earnings.
In comparison, simple interest is calculated only on the principal amount, which does not include everything the money gained so far.
Compound interest requires three things to work its magic: money, interest (earnings), and time.
To explain this better, let’s do a quick analogy.
Imagine a snowball rolling down a hill.
As it rolls down, it continuously picks up snow, making it grow bigger.
With each revolution, the more snow it absorbs.
And the longer it rolls down, the bigger it gets.
Now imagine that money is represented by the initial snowball before it rolled down the hill (principal)
The accumulated earnings is represented by the amount of snow it gathers as it rolls.
And time, of course, is represented by the time it takes to reach the bottom of the hill (investment timeline) and the frequency of the snowball completing one full revolution (compounding schedule).
Compound interest occurs when that initial snowball starts rolling down and begins absorbing snow with each revolution.
Each revolution results in the snowball having a wider surface area (bigger snowball = wider surface) which means it will absorb even more snow on the next revolution.
This is similar to how “interest on interest” works, since the compounding will be based on the new size of the snowball (principal + earnings) and not just on the original snowball.
And the longer it takes for it to roll down the hill, the bigger it will get.
How to Start Investing in the Philippines
Investing your money is possible whatever your financial situation is. Here’s a step-by-step guide on how to do this.
Step 1: Identify financial goals and timeframe
When it comes to investing, you need to determine what your financial goals are, the deadline you want to set for yourself, and your comfort level with investment risks.
You can either choose one of these setups:
Short term goals
Your goal for your investment could be to finance your vacation for the next summer, additional funds for your wedding, or have money to buy gifts for Christmas.
Step 2: Understand your risk tolerance
Assess how much risk you are willing to take. Younger investors might take more risk for higher growth, while those closer to retirement may prefer stability.
Step 3: Build an Emergency Fund
Before investing, ensure you have an emergency fund (typically 3-6 months of living expenses) in a liquid account for unforeseen expenses.
Step 4: Educate yourself
Figure out how you want to invest
After figuring out your goal and timeline, the next step is to decide the specifics of how you will invest your money.
You can do the DIY route, or you can have someone to invest your money for you. But before deciding on what to do, there are things you have to keep in mind.
First, you have to think about whether you want to do active or passive investing. Both styles have their advantages and disadvantages, especially if you want to focus on their long-term effects.
When choosing active investing, you need to thoroughly research investments and do your homework because you have to keep up with your investments at all times.
On the other hand, passive investing requires less effort because it entails having a hands-off approach.
Second, you need to think about how much money you plan on investing. If you don’t have much money, don’t get frustrated.
The amount of money you start with is not your end-all-be-all. Because you can always add more funds to invest in along the way.
The important thing to consider is you need to have an emergency fund in place before you risk your money on investments.
Finally, think about your risk tolerance. Each investment comes with its unique level of risk which is linked to its potential return.
Find a balance that works for you. For example, you can go with bonds that have low risk and low returns.
Step 5: Choose the right Investment Platform
Select a brokerage or investment platform that aligns with your needs and offers low fees.
Once you have figured out what type of investment you want to have, the next step is to choose an account provider and open an account.
For example, opening an account with an online broker will enable you to personally manage your account through buying and selling investments like bonds, stocks, and many more.
This is an amazing choice for people who have a large selection of investments and want to be more hands-on.
On the other hand, you can also go with a portfolio management company that will do the work for you.
This company has advisors and uses state-of-the-art technology to build and manage your portfolio in a way that aligns with your risk tolerance and goal. You just need to pay a small management fee.
Step 6: Grow your portfolio
Your investing journey doesn’t end after buying your first investment. It’s integral to take time to learn about other investments so you can diversify your portfolio. This stage involves key steps, such as:
Determining the best asset allocation for you.
Depending on your investment goals, try to see where you can put more money into. For example, if you want to reach financial independence and you can take on more risk, you can put money on alternative investments. If you have more capital, you can invest in real estate.
Continuously assessing and rebalancing your portfolio.
As the market fluctuates, your portfolio’s value will also go up and down. Don’t panic. This is extremely normal. That’s why it’s important for you to continually reassess and rebalance your portfolio so you can make sure that you’re on track to achieve your financial goals.
Be consistent with your investment.
Investing is not a one-time activity. It’s a continuous process. You must be a consistent investor if you want to achieve your goals and build a bigger nest egg.
Switch investments depending on your priorities.
As time passes, your priorities may change, so it’s important to adjust your portfolio as needed. For example, a woman in her 20s who has a high disposable income can focus more on high-risk investments since she has a long time to recover from any loss/failure.
On the other hand, a man in his 50s who is saving for retirement will need to put more money on medium and low-risk assets to protect his capital and ensure that his retirement fund will be enough to sustain him for the rest of his life.
Increase your contributions over time
As your income grows, increase your investment contributions proportionally.
You could also reinvest all your earnings/dividends to continuously grow your portfolio.
Related: How to Build Wealth in your 20s
Get expert advice.
Sometimes, it’s hard to determine which investment to choose, especially when you don’t know much about the financial markets and the risk involved.
If you’re not sure, get expert advice from wealth managers and financial planners. These professionals can guide you in selecting the appropriate investments based on your goals and risk tolerance.
Diversify your investments
Don’t put all your eggs in one basket. Spread your investments across different asset classes to mitigate risk.
Keep up with financial news and understand how economic events affect your investments. Avoid the temptation to react to short-term market volatility.
Investing is a long-term endeavor. Think long-term.
Investing Tips: How to Invest your Money Wisely
Every person’s financial situation is unique, and the best investment tip ultimately depends on your preferences and your current and future circumstances.
To help you get an understanding of how to invest your money to gain maximum returns, we’ve compiled this list of tips to help you.
1. Start Early
The earlier you start investing, the more you can benefit from compound interest. Even small amounts can grow significantly over time.
2. Set goals
Your investment goals should cover three major themes of your finances and how to manage them. First, they should be aligned with your life plan.
Next, it should make you more accountable to review your progress to ensure you are on track with what you want to achieve. Finally, it should serve as your motivation.
When it comes to goals, be specific. Start by writing each of your investments and how you can measure their progress. You should also break down your goals into short and long-term segments to match your life stages when you’re in your 20s, 30s, 40s, up until retirement.
Also Read: Personal Finance 101
3. Invest Regularly
Regular investments, such as monthly contributions, can help you build your portfolio and mitigate the impact of market volatility.
Trying to time the market can be immensely taxing since no one can see the future. One great tip to save yourself from effort and stress is to invest regularly and add money whenever you can.
When you do this tip, you can capture the lows and highs of the market.
As expected, no one has the same risk tolerance. If you’re nervous about trying out this tip, what you can do is invest regularly in the defensive sector to enjoy less volatility. This includes:
- Consumer staples
Regardless of the state of the economy, there will still be demand for these products and the companies that are part of this industry will still thrive.
4. Due Diligence
Understand what you’re investing in.
Don’t invest in something you don’t understand. Take the time to learn about different investment vehicles and how they fit into your overall financial strategy.
Before investing, dedicate time to research strategies to build your own as well. During the investment stage, make sure to keep up with the news about the market.
Eventually, you’ll learn that social and political issues can affect the value of any asset or commodity. Considering this, reading the news will help you prepare for upward and downward trends.
Do not fall into the trap of investing in a stock just because all your peers are talking about it. When you blindly follow others, you can lose a lot of money.
After the investment, continue to do research. Whether you’ve sold your shares or it’s still in the market, keep up with how it is performing. This way, you can see the best time to enter it once more.
Research when it comes to investments is not something that should be taken lightly since it will help you set yourself up for the best returns.
5. Diversify Your Portfolio
Spread your investments across various asset classes (stocks, bonds, real estate, etc.) and sectors to reduce risk.
With the multitude of options provided in this article, it will be foolish to choose only one and invest all of your money in it. As what has been said earlier, putting all your eggs in one basket will be a bad idea.
Pick two or more investment options. This way, if one fails, you can still rely on the other. More importantly, if all will become successful, you’ll generate more income.
6. Keep Costs Low
High fees can eat into your returns. Look for low-cost index funds or ETFs, and be mindful of transaction fees and taxes.
It’s also important to be aware of the tax implications of your investments and take steps to minimize your tax liability legally.
7. Don’t Chase Past Performance
Just because an investment has done well in the past doesn’t mean it will continue to do so. Base your decisions on research and sound fundamentals.
8. Review and Rebalance
Regularly review your investments to ensure they are aligned with your goals. Rebalance if your portfolio has drifted from your target allocation.
Optimize your portfolio to give you the maximum possible return, while also maintaining the risk you can carry.
The goal of portfolio optimization is to have a balanced portfolio where you can spread your capital across different varieties of assets. Only then can you balance your risk and reward outcome.
An optimized portfolio is an efficient one. Here, you should apply diversification tips and understand the systemic risk involved in each one.
This tip encourages you to use your interest, dividends, and other income distribution from investments to buy additional units, instead of receiving them in cash.
This will help you increase the value of the investment in the long run. When you reinvest your periodic income back into your portfolio, you can reap maximum returns in the future.
10. Manage Risk
Understand your risk tolerance and manage it through appropriate asset allocation and diversification.
Risk tolerance refers to your willingness and ability to stomach the decline of your investments.
When determining your risk tolerance, factor in how comfortable you will feel to maintain your current position when the value of the market declines exponentially.
Knowing your risk tolerance is very important when it comes to investing so you won’t feel burdened by stress all the time.
The best time to assess your risk tolerance is to see how you will perform when the market declines. During this time, can you still hang on to your stocks, or will you panic and sell?
11. Avoid Emotional Investing
Fear and greed can lead to poor decision-making. Stick to your investment plan and avoid emotional reactions to market swings.
12. Keep Learning
The financial world is always changing. Stay informed about economic trends and new investment opportunities.
As you gain experience, you may want to explore other investment opportunities like individual stocks, real estate, or even starting your own business.
13. Set and Forget
Consider setting up automatic contributions to your investment accounts to make the process effortless.
By automating your investments, you can invest more consistently and avoid stalling.
14. Have a Safety Net
Ensure you have an emergency fund in place so you don’t have to dip into your investments in case of unexpected expenses.
15. Think Critically About Advice
Evaluate the source of investment advice to ensure it’s not biased or based on someone else’s financial gain.
16. Consider the Impact of Inflation
17. Invest in What You Believe In
Consider your personal values and ethics when choosing investments, such as through socially responsible or ESG investing.
18. Only invest the money you’re willing to lose
Ready to start your investing journey? Here are some of the other investing guides you can read next:
- How to Invest in Stocks
- How to Invest in Cryptocurrency (Bitcoin, Ethereum, and Altcoins)
- How to Invest in Mutual Funds & UITF in the Philippines
- How to Invest in P2P Lending in the Philippines
- How to Invest in Real Estate in the Philippines
- PERA: How to Invest in Personal Equity & Retirement Account
- How to Invest in Venture Capital & Private Equity Funds in the Philippines
- How to Invest in ETF in the Philippines
- How to Invest in Bonds in the Philippines
- How to Invest in Forex in the Philippines
- How to Invest in Pag-IBIG MP2
- How to Invest in Fixed Income Securities
- How to Invest in Gold
- How to Invest in REITs in the Philippines
- How to Invest in Cooperatives in the Philippines
- How to Invest in IPOs in the Philippines
- Ultimate Guide to Social Trading
- Best Alternative Investments in the Philippines
- How to Invest in NFTs
- How to Buy Foreclosed Properties in the Philippines
- How to Invest in Art in the Philippines
- Best Collectibles to Invest in the Philippines
- Most Reliable Assets to Invest in Uncertain Times
Disclaimer: All information listed in this article is for information purposes only. Although utmost effort was made to ensure accuracy of information on this website, readers must not solely rely on it in making any investment or financial decision since it does not take into consideration the risk tolerance, financial situation, investment goals, and experience of readers. It is best to consult a professional financial planner or your bank before investing to make a more informed choice and limit your risk exposure.