How to invest when you start work
You can make money by investing wisely. But this is difficult for most young people who have just started work and don't earn that much. After all, if you find it hard to meet your daily expenses, then finding the extra money to invest is even tougher.
But consider the following question: If you have $1,000, should you spend it on going to karaoke, shopping or enjoying a meal with friends? Perhaps you think $1,000 is hardly worth thinking about because it’s not enough to have a good time on the weekend.
Yes, $1,000 doesn't sound like a lot. However, if you invest this small amount every month and the interest rate is 5%, that would be $70,000 after five years. Or $160,000 after 10 years.
Having friends and fun is important, but they don't have to cost a lot. Hiking, badminton and cycling are healthy and fun activities, but aren't that expensive. And if you think about it, how much of what you spend do you really need?
The point is, you do have some money to invest. It's about priorities and whether you want to spend, or save and invest every month. If you invest you will in time become richer. You may even reach the point in a few years when you can set medium-term financial goals.
The three keys to investment - principal, return rate and time
Each type of investment is different. Usually, the higher the potential return, the greater the risk. Although young people can generally handle more risk because they have longer time to invest, this should not be seen as a green light to make high risk investments without due consideration, which could lead to big losses. Also, the return on investment depends on the market and economy which are most difficult to predict or control. In general, what you could do better is to decide on the principal (the money invested) and investment period.
If you have just started work it's likely you won’t have much money to invest. Even so, you can consider monthly investments. This way you can start small and increase your investments as you earn more.
The investment period is within your control. If you decide to invest for the long term, the effect of compound interest would bring you unexpected return. This works because your principal would accumulate with interest earned over the investment period and yielding more return. Like snowball effect, the longer the investment period, the more you will benefit from compound interest. For example, for the monthly investment of $1,000 with an annual return of 5%, this will be $70,000 after five years and $160,000 after 10 years. However, if the investment is over 40 years the return will increase greatly to $1.5 million.
Three thoughts on long-term investment
- Long-term investment is like a marathon. To finish you have to keep going and resist temptation. If you follow others and make risky investments in the hope of winning big, then you could lose everything.
- Don't give up halfway. It's often tempting to spend your money on a new phone or a fancy holiday, especially if you have been saving hard. But this is like taking a break halfway through a marathon, it will affect your performance and you will fall behind.
- Most importantly, start investing now. The sooner you start the sooner you can reach your goal because of compound interest effect. Don't wait for next week or next month, because you might never start at all.