How to Start Investing – Investing and Financial Management for Beginners

I’ve recently started to ponder what ‘niche’ or theme This Online World is categorized under, and for a while, I was a bit stumped.

This blog started out as a hub of information related to passive income, and I published articles like my phone farming guide or ways to earn passive income with websites and apps.

However, I’ve also dabbled in marketing tips, blogging guides, freelancing gigs, and investing in cryptocurrency.

So, what really is This Online World about?

Well, it’s really about anything that assists people with making money online or developing passive income.

But here’s the thing: everyone has a different approach to making money.

You could run a dropshipping business, an online store, engage in freelance side hustles, or just stick to passive income streams.

Whatever the case, understanding some fundamental marketing techniques, SEO practices, and ways to drive traffic to a website/business can also assist people with their money-making endeavors.

And so, I suppose my goal for This Online World is comprised of 2 parts:

  • I want to teach people how to make money online or generate passive income.
  • I also want to give people the tools to get there: i.e. traffic generation, SEO tips, marketing ideas, or plain and simple guides that explain how something works.

This also brings me to my second point (apologies for the long introduction).

Why am I writing an investing post?

Well, making extra money online or developing passive income streams is one thing.

Deciding what to do with the money is another.

Personally, I use a lot of my earnings from phone farming or blogging to pay for random things from Amazon or chip away at utility bills.

However, my own goal at the end of the day is to have more disposable income which I can put towards investing (which in turn develops more income through dividends and portfolio growth).

I also understand that investing can seem daunting, especially when first starting out.

I’m 21, and while I’ve been investing for a few years, I’m also at a relatively early stage in terms of the whole net-worth/path to financial independence side of things.

Considering the fact that I’m a young investor with a bit of experience but a drive to learn more and help others, I thought I’d write this post on how to start investing and reach your investment goals.

So, what will this post cover?

  • How to set your investment goals.
  • How to select investment options that match these goals.
  • Side-hustling and saving your way towards success.
  • Some useful investing/budgeting resources and tips.

Let’s get started!

How to Set your Investment Goals – Investing for Beginners:

I think it’s important to always start with two metrics when it comes to investing: your investment/personal goals, and your time-frame.

If you want to contribute $20,000 to your investment portfolio in 2018, your methods of earning extra money online or how you save will be different than someone who just wants to start investing with $500.

Similarly, it is also critical to understand what you investment time-frame is as this is different from person to person.

Another way of posing this question is to ask yourself: when will you need to use the money you are investing?

Investment advice almost always begins by considering this question, and that’s for good reason.

Someone in their twenties will inevitably have a different investment time-frame, level of risk tolerance, and financial desires than someone in their mid 50s who is considering retirement options.

Generally, here is how you can frame your investment timeline:

  • 1-5 years: This is a short-term investment time-frame.
  • 5-10 years: This is a medium-term investment time-frame.
  • 10+ years: This is a long-term investment time-frame.

So, if you need to use the money you plan on investing within 3 years, you’re looking at the short term.

If you just want to invest and save for retirement in 20-30 years, you’re in it for the long haul.

Some people will argue that my timeline is a bit off, and that 1-3 years is short, 4-5 years is medium, and 5+ years is long term.

Whatever. 5 years is just a drop in a bucket, and I argue 10 years is the timeline in which a holding can really show an accurate picture of gains and losses.

But anyway…

Before you start investing, be sure to understand how long you will be investing your money for.

How to Select Investment Options to Match your Goals:

Since I’m a Canadian but have a predominantly U.S./global audience, I’m not going to dabble too much in specific stocks, ETFs, or mutual funds.

I’ll still tell you what I’ve been up to, but I’ll also remain more general so you don’t end up researching Canadian stocks for half an hour, wasting your time.

Anyway, time to get one thing out of the way first:

If you are investing for the short-term, don’t listen to what banks advise you to do.

Or, at the very least, take what they recommend with a grain of salt.

If you are only planning on investing for 1-5 years, a bank doesn’t have a lot of time to generate revenue from your assets.

Additionally, if you are young and don’t have too much money to invest upfront, they have even less to gain from establishing business with you.

I am ignoring factors like consumer lifetime value or customer relations, of course, but you get the idea.

Someone who has $500,000 to invest with a bank is a lot more attractive than a broke college student who has a few shekels to rub together.

And so, if you are investing for 1-5 years as a beginner, here is what most banks will suggest:

  • Option 1: put the money in a high-interest savings account.
  • Option 2: put the money in a GIC (guaranteed investment certificate).
  • Option 3: put the money in a lackluster balanced mutual fund the bank offers.

Cool.

Here’s the thing about option 1 and 2: they simply won’t beat inflation.

If you money loses around 2% of value per year, stashing your money in a ‘high-interest’ savings account that pays 0.50% is not a fiscally ‘winning’ solution.

Similarly, putting that money in a GIC that pays 1% isn’t too great either.

Option 3 is less poor, but banks will usually recommend the least risky mutual fund they offer that is conveniently packed with a high management expense ratio (MER) or fees.

Take this example: I had a friend who wanted to put $1,000 into their first investment account with CIBC.

The bank recommended this option:

cibc-monthly-income-fund

It was a basic monthly income fund, with a nice and juicy 1.47% management fee.

My friend took a bit of time to read some other options on CIBC website, and decided to invest in a balanced index fund instead:

Cibc-balanced-fund

The fund is still relatively low risk, has a lower MER (still not amazing, but better), and was overall a better pick (even for a 5 year time span).

Now, you might be wondering, is there really a big deal between these 2 options?

Consider this graph, which highlights the performance of both funds over the past 3 years (the index fund is in the blue):

mutual-fund-comparison

It doesn’t get prettier: check out the past 10 years:

10 year mutual fund comparison

It matters where you put your money.

At every stage, and at every income level.

So, here is my simplified breakdown for some investment options based on your investment time-frame:

You need the money in 6 months:

Find a bank that offers the best signup bonus for a high interest savings account and plop your money there.

This is the only time I’ll suggest not investing your money and just parking it somewhere, but that’s because many banks/brokerage accounts charge at least $10 for buying and $10 for selling…so you’d have to make more than $20 in 6 months worth of investing to just recoup that amount (plus deal with a shortened timeline and the chance that market volatility makes you lose money).

You’d actually be surprised at how many great bonuses there are for high interest savings account.

If you’re Canadian, I highly recommend checking out my Freebies page to see how Tangerine bank can earn you a free $100 and 2.50% interest for the first 6 months of your high-interest savings account.

If you don’t live in Canada, Google some local banks and find a nice signup bonus.

You need the money in 1-5 years:

I’d ultimately suggest doing something along the lines of what my friend did.

Find some balanced mutual fund or ETF with a low MER and quality composition.

Banks might advise against this and push you towards heavily managed funds, GICs, or other investment strategies, but you want your money to actually work hard.

Balanced mutual funds are generally comprised of about 60-65% equities and a remaining balance of fixed income options like bonds.

So, they’re not ‘risk free,’ but no investment that is worth your time (or that will beat inflation) is ever ‘risk free,’ so ditch that concept!

In fact, if you see the word ‘guaranteed’ anywhere, run. It either doesn’t outperform inflation or it’s a Ponzi scheme or something stupid.

You need the money in 5-10 years:

Maybe you’re saving for a down payment on your mortgage, a new car, or some other major expense.

And, maybe, you’re not quite sure when this life event will even roll around. It won’t be decades from now, but it might still take a few years.

If you’re in an awkward middle ground of investing, you still want to strive for a nice mixture of return and reduced volatility (in my opinion).

Personally, I’ve been investing in Mawer Balanced Funds for a while:

Mawer balanced fund investing

It isn’t even the best fund considering the MER is way higher than most ETFs, but for a 21 year old who just needs growth and some relatively low volatility, it made sense a few years back.

If you are new to investing, banks might assert that this is not a suitable option for beginners because it is too risky.

But here’s how this balanced fund has compared against the category average for the past 10 years:

Mawer balanced fund performance

Long story short, it has consistently out-performed the average by approximately 3% at every measure.

So, it’s a pretty nice balanced fund that clearly hasn’t lead to my/other investor’s destruction.

If you have time on your side, you can handle higher ‘risk.’

You need the money in 10+ years:

For long-term investing, here is my opinion in a nutshell:

  • ETFs are the way to go because they have extremely low MERs and can pay dividends.
  • Vanguard is the king of ETFs.
  • Investing in the S&P 500/United States is the way to go.

Here’s my reasoning:

If you won’t touch your money for 10+ years, having the lowest possible MER or fees will make a significant impact. Similarly, earning quarterly/annual dividends will also grow to be a considerable amount of income. This is why many ETFs are great.

As for Vanguard, they just can’t be touched when it comes to ETFs. Low fees, high earnings, dividends…great stuff.

And finally, unless the world as we know it ends, the top 500 companies in the United States of America will not cease to be profitable and pay their shareholders over an extended period of time.

I mean, think about it: these are some of the companies that comprise the Vanguard S&P 500 ETF:

  • Amazon.
  • Apple.
  • Various major banks.
  • Major oil/energy/electrical companies.

If the S&P 500 ends up losing total value over the next 20 years, we’re probably all dead or dying anyway in some post-apocalyptic society that’s run by Putin (I think he might be immortal).

As a Canadian, I invest in the Vanguard S&P 500 ETF (VFV):

S&P 500 performance Vanguard

If you’re looking for long-term investing, put your money with the United States.

Side-Hustling and Saving: A Path to Successful Investing:

To win a championship in soccer, you ideally want to have a nice blend of offense and defense (unless you’re Real Madrid).

Similarly, successful investing requires a mixture of offense (making money) and defense (saving money).

And no, you can’t out-offense your troubles away. Just think of all the millionaire athletes who have declared bankruptcy because of their spending habits.

Ultimately, it’s just important to recognize and internalize that you will need to play both these roles if you want to optimize how well you invest your money.

Major disclaimer: unless life, circumstances, or choices have forced you into a position where more urgent things must be accounted for first (i.e. health, family emergencies, basic necessities, or debt), you can start investing at any life stage.

It’s all about selecting realistic goals and then taking appropriate actions to meet them.

Take student life, for example.

Tuition, textbooks, rent, and food are major expenses. Additionally, income can be difficult to come by as a student since school and homework are unfortunate realities that suck up time.

However, if you can scrounge up a few phones from some friends or purchase some for a cheap amount, you can start phone farming as a side hustle and make an extra $300-$500/year, no problem (if you live in the U.S. or Canada).

Boom. That’s the start of a modest investment portfolio right there. Top that off with some savings from paychecks throughout the year, and you can start investing (even as a student).

Alright, so phone farming isn’t your thing (that’s fair…it is odd).

Well, earning an extra $1,000 a year only requires that you find a way to earn an extra $83.33 a month.

If you can commit yourself to picking up one extra shift every now and again, or starting one online side-hustle, you’d be surprised at how quickly you can amass the beginnings of your investment portfolio.

I’ve written a guest post on a blog called Financially Mint that covers 12 great side hustles you can use to make an extra $1,000 a year, so check that out too!

Useful Investing/Budgeting Resources and Tips:

I want to make one thing clear from the start: you don’t need to spend money to learn how to budget, save, or invest.

I talk about why DIY investing/saving is more effective than using robo-advisors or passive investment apps in my post on the best and worst investing services, but I want to drive that point home.

If you want someone to do the work for you, you will have to pay for it.

Additionally, you’ll also end up learning less and ultimately relying on others for your financial well-being. Not cool.

If you want to budget, you literally just need an Excel spreadsheet and diligence.

Here’s the template I’ve made for my own budgeting purposes, plus some example numbers:

budgeting excel spreadsheet

It’s that simple.

Create your spreadsheet, always collect receipts when you purchase something, and take 1 day every week or 2 to plot your expenses and earnings.

This is the most important thing you will ever do as an adult.

It might seem excessive, or unimportant, but if you don’t understand where your money goes, you have no control.

Additionally, plotting your spending and saving allows you to spot trends in your habits.

You might not realize that you’ve been spending 20% more money than usual on clothing for the past 3 months, or eating out a bit too much, unless you have a record of your behavior.

Plus, having your net saving rate fluctuate based on the data you enter into the spreadsheet is the most satisfying (or horrid) feeling there is.

Plugging in an extra $200 of side-hustle income for the month and watching my net saving rate increase is euphoric. Buying another pair of shoes I don’t need and watching the rate dip generally makes me think twice, down the line.

In terms of other resources, there are 2 posts in particular from Mr. Money Mustache I highly recommend reading:

Mr. Money Mustache is a blog run by a man who reached financial independence (with a family) in his early thirties. He knows a thing or 2 about money and the power of saving.

If you’re looking for more resources to read, there are 2 books that I have also found valuable:

Finally, if you do want to start investing today, there are a few great ways to go about it.

Firstly, you can just go to your current bank and open an investment account with them. If you make it a brokerage account (ideally with no fees), you can invest in funds that aren’t just managed by your bank, which is nice.

Personally, I’ve been investing with my bank for years.

However, if you want to dabble in the realm of commission free stock trading/investing platforms, I highly recommend Quest Trade.

Lowest commission

Quest Trade is a great option for those looking to start some low/no fee DIY investing, so I’d give them some consideration!

You can sign up for Quest Trade with my link to start investing today while also supporting This Online World!

You’ll also receive $50 in free trades if you fund your account with $1,000.

Some Final Thoughts on How to Start Investing:

While this guide is sort of jumbled, covers multiple topics, and is written by a 21 year old, I hope it at least covered some fundamental aspects of investing and financial management for beginners.

Ultimately, This Online World is all about making money online and generating passive income.

However, I think if I didn’t write posts on investing and financial management every so often, I would be omitting a crucial aspect/the point behind all of this.

Earning extra money online or generating passive income is great.

Watching your hard earned side hustle money grow is even more satisfying.

Oh, one more thing before I wrap this all up.

I know I bashed on banks a bit in this post, but banks are great too.

I don’t think they’re too helpful for people who are starting out on their investment journey, but for complex financial planning or wealth management (you know, for people who have wealth), financial advisers and banks can truly go a long way in providing some valuable advice and strategy.

At the end of the day, as long as you take control of both your spending and saving and work towards the beginning of an investment portfolio, you will be well on your way to establishing some fundamental life skills and improving your finances.

Note: I am not a financial adviser or expert. I’m a 21 year old dude who likes to dabble with investing and making money online. Do what works for you.

Thanks for reading!

Be sure to share this post with someone who needs a little push to start investing today!

 

 

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