In today’s world, investing has become extremely popular because of work from home caused by COVID-19. In addition, social media (Twitter Reddit) became a source of knowledge for many young people entering the investment market.
The major credit regarding young people entering the investing world is due to Robinhood. Robinhood with the free trading and fractional share purchases made it possible for anyone with a smart phone to invest.
However, in order for someone to invest, they need a steady income that can generate a positive cash flow unless they inherit wealth elsewhere.
How do you save money to start investing?
First- Paying off any credit card debt is one of the biggest investments one can do. For young people right off high school and getting ready for college, it’s extremely important to avoid credit cards. Starting on orientation day, the majority of credit card companies will be at the lobbies of campus universities offering credit cards at 12 to 24 months zero interest. But what happens after that? Its usually a huge amount (20%+ interest) on the balance of the card. I personally was a victim of this scam due to my lock of financial knowledge. I used to pay just the minimum amount due on my credit card and after a while I noticed that I was paying every month, but the balance was not decreasing. After reading the fine prints, I understood that I was paying 24% interest off the balance. What kind of investment will yield this type of return? Almost impossible to catch up. After seeking financial advice from an expert, I understood that I was not only paying the 24%, but that 24% was also compounded. How have you heard of compound interest? Albert Einstein called it “Compound interest is the eighth wonder of the world. He who understands it, earns it; he who doesn’t, pays it. ‘ If you invest a sum of money at 10% for five years, you will multiply your wealth by 1.6 times.”
How does compound interest work?
Compound interest (or compounding interest) is the interest on a loan or deposit calculated based on both the initial principal and the accumulated interest from previous periods.
For example: Say you put $1,000 into a savings account with a 10% interest rate that compounds annually. At the end of the first year, you’ll have $1,100 which is the initial $1,000 in principal plus $100 in interest. That $100 is “simple” interest. This interest based is only on the principal amount invested.
At the end of the second year, you’ll have $1,210 which is the $1,100 from the previous year plus $110 in added interest (10% of $1,100).
Instead of calculating interest based only on your original principal, compounding interest calculates your annual interest based on the principal plus any previous interest you earned on that principal.
By the end of the 10th year, you’ll have $2,594, more than double your initial savings. You have doubled your money without adding any more of your own money after your initial investment. Imagine if you had added monthly to your initial investment? The miracle of compounding would’ve rewarded you significantly.
Second- Get a job that rewards you with money.
The goal here is not the amount money you make, but how much you save after expenses.
For example: If you are bringing in $5,000 a month after taxes and have expenses such (luxury apartment, cars, name brand clothing, fine dining) and ended up spending $6,000, you won’t be in a position to invest due to high expenses. On the other hand, if you are bringing in $1,000 and ended up spending only $900, it leaves you $100 of disposable income that can be invested.
How can you minimize your spending?
Live with your parents for a little while if possible.
Avoid credit cards
Make your own food whenever possible (saves money and you know exactly what you are eating) it’s a win win.
Avoid monthly subscriptions (Netflix, Hulu, HBO) and automated payments (Apple Pay, CashApp, Venmo). Many will think, Venmo and CashApp are very easy to use. Yes, they are, but at the same time its much harder to control your spending’s if you keep on just swiping. It’s much easier to notice how much you are spending on things (you probably don’t need) if you are handing in dollar bills.
These are small steps anyone can take, and it will make a big difference over the long run. However, I am not one of those that wants you to save every penny and live a miserable life in order to be wealthy in your retirement age. I believe in a well balanced life. It is totally fine to buy yourself a nice pair of shoes or take yourself to a nice restaurant after accomplishing something significant. If Starbucks is something you enjoy, I will not discourage anymore from grabbing a cup of coffee few times a week. If you enjoy traveling, take a trip whenever possible by monitoring your spending.
The ultimate goal here is starting to invest early while having fun with it.
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