Beginner’s Guide to Investing – Including the Rule of 72
Are you a teenager or young adult who dreams of one day becoming financially independent? Managing your finances and starting to think about your financial future may seem premature when you’re not earning or managing a lot of money yet, but the truth is, you’re never too young to start planning for your financial future.
The biggest obstacle is often not knowing where to start.
Nishlen Govender and Mike van der Westhuizen, both portfolio managers at Citadel, unveiled three key fundamentals to help you start your financial journey.
1. Key concepts are a good starting point
“Financial lingo sounds intimidating, but knowing the basics of certain concepts will help you better understand your options,” Govender said, offering explanations on the following key points:
Equity: When an investor invests in an entrepreneur’s business, he may acquire a percentage of that business, for example, he may say, “I’m going to give you R 1 million in start-up capital for your business in exchange for % stake in your business. “
This participation is also called “equity”. Investing in stocks means owning part of the business in which you have invested. This form of investing is considered the riskiest because businesses can fail, but it also gives you the best chance of reward, especially if the company you invest in becomes the next Facebook, Apple, or Tesla.
Debt financing: A business or entrepreneur could use debt (or more simply loans) to provide the money needed to start or finance a business. Investors might tell you, “I’m going to give you R 1 million of start-up capital for your business, but you have to pay me back with 5% interest within two years plus the original capital. “
This means that you have to pay back five hundred thousand rand to your investors during this period. You may have heard of bonds or the bond market – this is debt financing. Simply put, a bond is a loan taken out by a business or government.
The main difference between debt financing and equity financing is that in debt financing, you receive your loan amount with interest (the amount of interest is known in advance). In equity financing, you own a stake in the business and therefore have unlimited upside potential, but you could lose your capital.
Cash: This is basically the money you deposit into a bank account. You won’t necessarily lose your money there, so it’s very low on the risk scale, but you’re not going to make good returns on it either – it’s a safe, low-return investment for those. who want a little upside, but a lot of security in this investment.
Goods: Whether it is a house, apartment, apartment building, shopping mall or office building, it is a physical asset in which you can invest, whether through a debt investment or an equity investment. So even if the company that manages the property goes bankrupt, there is still a physical asset that you can sell to recoup all or part of your investment.
This makes it slightly less risky than investing in stocks, although the real estate market can be quite volatile.
In the graph below, you can see that “investing in stocks” is at the very top of the risk and reward scale, while “investing in cash” has the lowest potential risk and the lowest potential reward.
2. What is the rule of 72?
“Our goal should always be to generate the highest returns with the lowest risk. The Rule of 72 is a practical concept for understanding the return on investment (ROI) you need to achieve your goals, ”said Govender.
The idea is to take the number 72 and divide it by the return you expect, which will give you a good idea of how long it will take to double your money.
For example, if you find an investment that gives you a 12% ROI every year, it will take you six years to double your money – because 72 divided by 12% gives you six. If your bank gives you a 2% annual return on your money, it will take you 36 years to double your money.
3. The importance of investing early
Van der Westhuizen said that when you’re a teenager or young adult, it can be easier to invest in opportunities that offer higher risks, but also higher rewards.
“Once you have a family, you will probably have to spend most of your money on family financial responsibilities – and during your retirement years you may need to prioritize your medical bills, so you probably won’t really be looking to invest. in the next big high risk, high reward opportunity, ”he said.
There are many benefits to starting your investment journey as early as possible and talking to a registered financial advisor is always encouraged – they will get to know you, your current financial needs as well as your financial goals for the future and the future. will use to create a financial roadmap tailored specifically for you.
Some things your financial advisor should consider, given your young age:
Invest in long-term stocks
Stocks or stocks are the most volatile in terms of how your invested money fluctuates over time, but you are guaranteed excellent returns over the long term.
If you invest in the stock market you might see your money go up and down every day, so in the short term it’s very risky, but if you stick with it for 20 or 30 years your risk will level out, and you will see. good growth.
If, for example, you invested in the S&P 500, the US stock market, at any time between 1926 and 2015, for only one year and you withdrew your money, you had a 74% chance of making positive returns, but if you were invested in it for 20 years, you had a 100% chance of seeing a positive ROI.
If you start investing 200 Rand per month at age 25 and stop at 35, you will get better returns in your lifetime than someone who started with 200 Rand per month at 35 and kept paying. for the rest of its life (assuming the same returns on investment).
It comes down to the concept of compound return – money makes money. The value of your investment increases, then you get more growth over your growth, and ultimately you see exponential growth. The same goes for retirement investments.
Start in your 20s or you may not get enough.
Define your goals and establish a budget
Decide how much you are willing and able to invest per year. Look at your income, whether it’s spending money or income from a job, and divide your expenses into fixed expenses (for example, food and shelter) versus variable expenses (for example, funny things). Try to keep these two expenses as low as possible so that you have something left to invest.
Decide where to invest
You can either do it yourself or seek professional help. Whatever you invest, always try to increase your investments by a small margin each year, say 5%. This will be of great benefit to you in terms of compositional effects.
“No one expects you to know everything about the financial world when you first start looking at your investment options – the important thing is that you have the foresight to see the importance of starting early and that you are open to discussing your options. Said Van der Westhuizen.
Read: Here Are The Basic Taxes You Need To Know If You Are Investing Your Money