Getting Started in Investing
March 3, 2010
1. The Difference Between Saving And Investing
Welcome to the Fool's guide on 'Getting Started in Investing' in which we look at what makes an ideal first investment.
We're going to cover topics like:
- what to do before you start;
- setting out your investment objectives;
- your main investment options;
- why The Motley Fool likes shares;
- various vehicles you can use to invest;
- why we like index trackers and regular investing;
- how to pay less tax; and
- what to do next.
On the face of it saving and investing seem like the same thing. They are both things that we do with our spare money, after all. But deeper thought suggests that there is a difference between them.
Saving is almost an unconscious act where we put money into deposit accounts, or even an old jam jar on the sideboard, so that we have something for that proverbial rainy day. It is a way of giving our ordinary life a bit of security so that we don't find ourselves strapped for cash at some point.
Investing is more of a conscious decision. It is about making plans for the future so that we know we can cope with expensive events like retirement or weddings.
When you save money, your capital is secure. You are (usually) guaranteed to get back the sum you put in, plus interest.
When you invest you have no such guarantee. Your capital is at risk. In return for this, you expect to get more back than you put in, plus a little income on the side as well, perhaps. So when you consider any investment you need to ask yourself a few basic questions:
- How much extra return can I expect, and with how much probability?
- Do I really understand what I'm investing in?
- Do I appreciate the risks I'm taking and how volatile this investment could be?
Before you invest...
You need to make sure the rest of your finances are in order, before you start investing.
Firstly, you need to get out of debt. By this we mean all debts apart from your mortgage. So you need to have paid off your credit cards and any personal loans you may have. The reason is quite simple. It is unlikely you will make more from your investments than you will pay in interest on your debts. So pay off your debts first. Arguably, it will be the best 'investment' you will ever make.
Secondly, you need to put cash aside for emergencies. How much cash is appropriate will depend on your circumstances. If you have dependents, or if you are uncertain about your job prospects, then you might more put aside than others. One rule of thumb is that you should have enough cash set aside for at least three months' living expenses.
Last of all you need to be prepared to invest your money for a minimum of five years and preferably a lot longer. Although you can expect to get more by investing than saving, the value of your capital will fluctuate all the time.
If you need to get your money out in a hurry then you may not get everything back. So, if you want to use your money to put down a deposit on a house or buy a new car, then investing is not the best way to do it. If you need a guaranteed amount of money within less than five years, something like a high-interest savings account is a much more sensible option.
OK, now the pleasantries are out of the way, we can get cracking. Simply click on the numbers below to move between the sections of this guide.