To be truly successful: to be free to do what you want, to live where you want, go where you want and have what you want, you need to start investing to become financially free.
In order to be financially free, in charge of your life and your time, you need to be the boss of your own profitable business or you need to set up passive revenue streams that will bring in enough money to live on.
Entrepreneur vs Investor
In order to be your own boss you need to work incredibly hard and have a great idea.
In the beginning, most of us probably don’t have that great idea all figured out yet and most of us probably aren’t in the position to give up our regular paying jobs. I know I’m not ready to jump all in and risk everything.
Even for those who do have that great idea brewing away, it’s important to remember:
So, while it’s a great way to financial freedom, starting your own business is perhaps not the best place to start. From my own perspective, it’s something I aspire to do, but it’s something I need to prepare a lot more for.
On the other hand, developing a passive income stream through investing is a much easier proposition. By investing your disposable income, you have the potential to free yourself and build a base that will help you to develop your own business in the future.
So, to begin with, my fiancée and I decided to become financially free and that our best course of action would be to start with investing.
Read on to learn how to become financially free through investing.
If you keep your life savings in your back pocket or under a mattress, instead of investing, the money doesn’t work for you and you’ll never have more than what you save or receive through inheritance. Conversely, investors generate money by earning interest on what they set aside or by buying assets that increase in value.
So, the idea is – save your money, instead of spending it, and invest it, either invest it in the bank, or buy stocks, or buy appreciable assets. This way your money is working for you; it’s earning interest, it’s earning dividends, it’s appreciating with the value of your assets.
For me, this idea was obvious for some time. I had already set up a long term savings account years ago. I put money away were I couldn’t spend it and I watched every month as it made me $5, then $10, then $17.
In the beginning, it doesn’t seem like much. You put money away and you receive a tiny amount of interest, or dividends, or the price increase of your shares amounts to little more than nothing. But, in the long run the power of compounding will set you free.
What is Compounding?
Compounding is the process in which an asset’s earnings, from either capital gains or interest, are reinvested to generate additional earnings over time. This growth … occurs because the investment will generate earnings from both its initial principal and the accumulated earnings from preceding periods. Compounding, therefore, differs from linear growth, where only the principal earns interest each period.
So, buy reinvesting your gains back into your investment, you start to earn interest on the gain plus the initial investment. Over time, if you keep making gains and if you keep investing, the amount of interest grows bigger and bigger, until one day it’s at a scale that is actually worth something.
Let’s say you invest $100 at 10 percent annual interest. At the end of one year, you have $110 with either simple or compound interest. At the end of the second year, you have $120 with simple interest or $121 with compound interest. After five years, the amounts are $150 for simple interest and $161 for compound, and after 10 years, the amounts are $200 and $259 respectively. The difference then really starts to accelerate: At the 20-year point, the amounts are $300 for simple interest and $672 for compound. And, after 50 years, you could have either $600 with simple interest or $11,739 with compound interest.
So, while we start small, if we can keep that money in and keep reinvesting the growth, it will grow at a greater rate until one day it is worth something.
Having learnt this lesson, my fiancée and I decided we wanted to make it go a bit faster. So we decided to start looking for better options for a higher return and we also decided to increase the amount we invested. So, we saved everything we could and invested as much as we could.
HOW TO INVEST?
In the modern world there is a mountain of investment options that will allow you to access the power of compounding – banks, bonds, managed funds, indexes, and on and on.
For those of you who are extremely risk averse, then there’s still the bank. The bank is very safe, and a great way to start saving, but it has a lot less potential.
The bank built my base of savings and I still have a portion of money in a cash account for everyday and a portion in a term deposit for when I need to access more.
However, I decided I’d take a portion and try for a higher rate of return.
I thought, ‘why not buy shares and own part of a company – we’ll get a slice of their profits as dividends and the price of shares will likely go up over the long term.’
What are a shares?
People invest in shares with the objective of generating wealth – either through potential share price growth, via income paid as dividends or a combination of both. Shares can be bought and sold on [a share] market. Also, you don’t need large amounts of money to get started – you can buy as little as $500 worth of shares. As with any investment, shares also carry risk and investors need to inform themselves of these.
So overtime, if you invest in good companies, that pay dividends and offer price increases, your money will be growing all on its own, while you simply watch it.
OUR BASIC MODEL OF INVESTING?
Here’s how we started. We are not experts and this is not advice. We just want to share our experience and you can see how it goes. We’re really hopeful that we are successful and we can leave a path that others may want to follow.
1 Find a broker and get some initial advice.
The first step we took was to get a stock broker, bank our money with them and have a quick discussion to decide on our strategy. We got a list of options and decided on what made sense to us. We wanted to keep things very simple and we wanted to be really safe. We don’t know about mutual funds, indexes and derivatives, yet, so we are sticking to boring simple investment options.
2 Study the market and find your level of risk.
Next we looked at companies we might like to invest in. We wanted to keep it simple and we wanted to be safe. We started by looking at companies that had a great track record. We narrowed down our selection to super safe companies – known as blue-chip companies. Companies that have been around for ten years and will almost definitely be around for the next 20-50 years.
From our list of super safe, stable companies we started to look at their numbers and see their level of profit, their level of debt, their dividend yields and their price history and trend. (These are all easy to follow and we’ll cover these things at a later date.)
3 Study the market and choose the right time. (The right price)
Having looked at the company information, we narrowed down our selection to companies that made profit, had reasonable levels of debt, and paid consistent dividends.
This way we knew the companies would be around for a long time – we didn’t need to worry too much they’d go bankrupt. Also, they paid dividends, so even if we bought the shares and did nothing else, we would be receiving a return on our investment. (Sometimes companies choose not to pay dividends and you can never guarantee how much they will pay, that’s why it’s important to research.)
From there, we had a list of companies we liked. We then looked at their share price. Company share prices fluctuate with the market. The idea is to buy the share when its share price is low.
So, say that bank stock you like tends to fluctuate between a price of $50 and $60 over the year. If you buy at $60, the price is likely to fluctuate down in the short term and you will lose value. Alternatively, if you buy at 50 and it goes up to 60, you can make $10 per share – a great return.
So, we looked at the price charts and decided on the companies that were relatively low on their usual stock price fluctuations.
4 Study the market and learn your lessons.
Here, an important note is to also look at long-term price information and study the market. We ended up buying relatively low for the year, it all shot up and we thought it had room to go higher. However, the market was at the highest it’s been in 5 years and we really should have sold. Anyway, you learn by playing. If you want to play, you need to track the market and track price movements.
Nonetheless, even though the market came down, we still have the same number of shares and they are still paying dividends. In the long-run, I have faith our safe and steady blue-chip stocks will come back and even go to a higher price. All I need is time and patience.
There is obviously a lot more to stock investing than this quick introduction. In time we will cover all the rest as I learn how to do it all myself.
This is where we started. I used to think all this stuff was beyond me, but now I want financial freedom and I’m having a go. So far, we’ve had some great highs and some bad lows, but at the end of the day, we’re now part owners in some great companies and we get a share of their profits and hopefully in the long-run, the next big market upswing will lift the price to a higher level and we make a good capital return. Either way, we have time to wait and we have a trickle of money coming in.
We’re not experts, but we know we’ll never learn anything if we don’t try. The first big lesson we learnt was that no matter what rules you think you know, it’s much different when you are actually playing the game. You need to play to learn. So work out your model, what works for you, and learn, learn, learn, until you have mastered the game and your money is making you rich. As we hope to do.
If you liked this article, perhaps you would like to read more about investing with purpose.
Disclaimer: The information on this site is provided for discussion purposes only, and should not be construed as investment advice. Under no circumstances does this information represent a recommendation to buy or sell securities. Talk to a financial advisor and tax professional before you invest.