Investing is a process of multiplying your money at a compounded rate. You invest your money to create wealth for yourself.
In this article, we are discussing the prerequisites of investing money. This will help you know what you need to know before making an investment.
These investment prerequisites may seem basic to you yet it is important for you. This will help you understand the behavior of money and how money works.
Investing is like planting a tree. At the time of sowing, it’s just a seed but over time it’s become very big. It works like compound interest.
Here are 7 prerequisites of investing money.
Anything multiply by zero is zero. So it is very important to have capital in your hand to start investing.
Treat investing like a business. In any business, you require investment to start. It is said that any business requires land, labor, and capital.
But in investing you only require capital to start.
There are many investments you can start with literally no money. Like, you can start investing in the stock market with very little money.
In the stock market, you can only learn with little money. If your goal of investing to build wealth with the stock market then you need capital.
But capital required in the stock market is very less compare to other investments.
There is also an investment where you need a large capital to start. Such as real estate investing. Although you can take a loan from the bank to buy properties. But first, you have to submit down payment to buy properties.
Eagerness to learn
The second prerequisite of investment is an eagerness to learn new things. If you want to be a good investor then you have to learn new things daily.
In investing the saying is very true. “ the more you learn, the more you will earn”.
If you are a stock market investor then it is very important for you to learn new things daily.
If you are in the investment field then you probably heard about warren buffet. He is a learning machine. He read almost every day. He is now 89 years, still, he reads a lot.
In his early days, he read all the books on investing which he gets in Omaha public library.
Investing money is not easy so it is very much important to lear
Learn the power of compounding
Investing is a process of building wealth. Most of the people do not believe that through investing you can build wealth.
They learn about compound interest in school but do not know about the real power of compoundings.
Before investing in the stock market it is also very important to know the power of compounding. How compounding can work with your money? A small amount invested for a long period of time can give make you rich.
To calculate the compounded return of your investor go to any CAGR(Compound annual growth rate) calculator.
Rule of 72
This is a famous rule of compounding. And it is also very famous in investing.
Years to double your money= 72/ rate of interest rate
It is that simple.
If you know the interest rate, you can determine how many years you can double your money.
By this rule, you can get an approximate idea. This is important to know how many days your money can double.
Investing goals is very important. First, you decide what are your investing goals, what you want to do with the money you get.
Before investing goals it is also important that you also know why you want to invest.
Your investment goals can decide how long you want to invest. It can also help you to decide which investment vehicles you should choose according to your investment goals.
Your investment goal also determines the Risk you can take with your investments.
Suppose your investment goal is to pay down payment for your home 2 years from now, then in this situation, you can not put your money in high-risk places such as in equity. You probably put your money in a much safer place, like Fix deposit or in some in safer debt fund.
Start early investing money
Those who start early have a great advantage.
The age factor is also very important in investing. If you are young then you have more advantages over older people. You can see in compound interest formula that time is an exponential term. The more time you have the more return you can get.
₹2,000 invested per month in SIP when you are 25 years old. And assume you will get a 15 % rate of return on your investment. When you will reach the of 60 you will have ₹ 29,721,290.
If you start investing same ₹2000 when you are 35 years old, you will only have ₹ 6,568,148
You can see the difference.
If you are starting at the age of 35, to get the same return that of 25 years old, then you have to invest ₹ 8,900 per month.
You can see that difference is much more.
Early investors have benefits over the old investors.
Don’t get disappointed if you are late in investing. Just start where you are.
Invest whatever money you have and your money will increase. Thanks to compound interest.
Avoid the limiting belief
The next prerequisite is to eliminate the limiting beliefs about investing. Most people never start investing because they have limiting believes about investing.
They think that investing money in the stock market is gambling.
they do not invest because they have limiting believes about money also. Investing is all about becoming rich and creating wealth.
If you have limiting believes about money, how you can have more money. Money comes to those who respect money.
You have to believe that money is just a tool you have. The only work of money is to trade value. If you make money god then you will in great trouble.
some of the limitings believe people have are:
Money is the root of all evil.
The rich person is crook.
You can’t be both rich and happy.
You have to do dirty things to get rich.
You won’t be social when you will have lots of money
As you know capital is important to invest.
The most important question is that how you can accumulate capital at the first place.
The answer is.
You have to save money.
There is the best way to save money is to “Pay yourself first”. It is important to pay your self first before you pay anybody else.
How you can pay yourself first
Open another account other than your salary account. And whenever you get your salary, just put a fixed amount of money into this account. You can do it in the same account by opening a recurring account.
It should not be less than 20 % of your salary.
At the end of one year, you will have money to invest. Make it a habit to pay your self first every time you get a paycheck.
The term pays yourself first is taken from one of the classic book Richest Man in Babylon.
It is a very short book. You all should read this book.
Have you read all the prerequisites of investing money? Which one you like most, comment below in the comment section.
My personal pick is to avoid limiting belief. Sometimes we are responsible for our indecision. Our limiting beliefs stop us from making decisions. So, avoid those limiting beliefs.
Everyone should start investing money on a regular basis. It is a way to build wealth and secure your retirement.