Saving your money is very different from investing it. You might have heard that it’s better to put your money under your mattress than in the bank. Saving money is a good financial habit to develop because it involves understanding exactly what your expenses are and how much disposable income you have to either spend or put away in savings. However, if you’re thinking about trading in cryptocurrency, you need to start thinking beyond that so-called mattress money you’re putting away for emergencies. If you don’t have any money saved, start today by making a promise to yourself that you’ll put at least 20% of your monthly income into savings. Create a debit order for this amount to go straight into your savings account so that you’re less tempted to use that money.

If you’re already saving, then investing is the next step you should take because investing money means that you’re making your money grow. You will end up with more than you initially invested, and grasping this concept will help you develop your cryptocurrency trading skills and set you on the path to financial freedom. In this chapter, we’ll discuss exactly what investing is and why it’s important, especially for young adults who are just putting their financial plans into motion. The different types of investments that are readily available to you will be mentioned, and you’ll learn about why it’s important to have different-sized investment eggs in different baskets, i.e., diversifying your investment portfolio.

What Is Investing?

Learning how to invest to make your money work for you can give you some financial breathing room to make bigger plans for your future. Your investments are catalysts for your financial independence. Understanding what investing is means knowing the difference between financial necessities and financial goals. Financial necessities include your monthly expenses, paying off your debts, your cost of living, and saving money for emergencies. These should be prioritized and paid as soon as you get paid each month. Financial goals are things you want to plan for now so that they can happen in the future. Examples of financial goals could be wanting to retire early (before the age of 65) or buy a house or apartment before you’re 30. Investments are vehicles you can use to achieve your financial goals because you put your money into valuable assets. The value of these assets increases over time, and you make a profit from your initial investment. Financial goals can sometimes seem unattainable because many people are unable to make their paycheck stretch further than their expenses. Statistics show that 74% of young adults aged between 18 and 25 have delayed a major financial decision because of the debt they owe from student loans (Gillespie, 2023). This is concerning because debt holds people back from securing their financial future. However, you can invest and still pay off your debts if you see investing as important for your long-term financial health as paying off your debts is in the short-term. You don’t need a large lump sum to start investing; you can start building your financial future with as little as one dollar.

You can invest in a variety of assets, including but not limited to real estate stocks, bonds, precious metals, cryptocurrencies, and businesses. Many people don’t consider investing because they’re hesitant to put their money into something where the yield or potential is uncertain. The financial concepts relating to certain investments can also be complicated. However, everyone can become an investor at any age if they consider the following factors in relation to their personal circumstances:

●     Financial goals: Ask yourself what it is that you want to achieve by investing. Do you plan to invest for the long-term and only use the money earned once you retire or reach a certain age? Do you plan to use the money in the next two to five years to make a major purchase, like a house, business, or car? Your financial goals will ultimately inform your investment strategy because you’ll know why you’re investing and what you want out of it.

●     Amount of disposable income: Having a monthly budget that you stick to will clarify exactly how much money you have to invest. Remember to consider that as you get older and as you progress in your career, you will earn more money each year. For example, being able to treat yourself to a fancy dinner once a month when you’re 21 is a luxury, but you might do this more frequently when you’re 28. Try your best to keep your lifestyle standards in check by keeping in mind the difference between your needs and wants. This way, you’ll always have the same amount of income, if not more, but never less, to invest.

●     Risk appetite: Consider how much risk you’re willing to take on with the money you have. Are you willing to put your money in a high-risk investment that fluctuates on the financial market to receive a potentially high reward in a short amount of time? High-risk investments could also make your initial investment drop in value suddenly and then rise again, depending on how volatile the market is. Would you prefer to invest a large amount of money in a long-term investment that grows in value steadily over time? You can take an online investment risk assessment for free to gauge whether you’re averse to risk, a conservative investor, or a high-risk investor. Knowing where you lie on the risk consumption spectrum is essential to helping you make an informed decision about the types of assets you invest in and your investment strategy.

●     Managing your investment: Think about whether you want to be an active or passive investor. Ask yourself if you want to monitor and make changes to make your investments grow on their own or if you’d prefer to hire a financial advisor to manage your portfolio for you. Both methods are valid and beneficial, but your choice should depend on how much time you have to dedicate to monitoring the performance of your investments and how involved you want to be.

Now that you have a basic understanding of what investing is, it’s clear that choosing to save your money instead of investing is a way to essentially lose money. Depending on the risk involved, investing is guaranteed to grow your money and earn you more than you put in. Investing is a step further than saving, and trading is a step further than investing. Trading requires you to constantly change your investment position depending on market trends. This is a high-risk activity that can either yield a very high reward or be disastrous for your investment portfolio in a matter of hours or days.

Why Is Investing Important?

We live in a world governed by the rules of capitalism. That means that your individual wealth determines how comfortable your life and the lives of your descendants will be. This system causes most people to stress about financially planning out their futures so that they’ll have enough money to live well into old age. Your wealth and financial status can determine your perspective on why investing is important. Your investment goals will be informed by this perspective. Regardless of your perspective, it’s important to have financial goals.

If you fall into the category of having a more needs-based outlook on finances, then investing is important because it provides you with financial security. Investments mean that you’ll have some money or assets stored away in case of emergencies. These emergencies can come in the form of suddenly losing your job, which happened to many people during the COVID-19 pandemic. A recession is another reason to have investments because they give you financial breathing room to consider your options instead of making emotional decisions. Another reason why investments are important for your financial security is that they take care of the problem of inflation. Your investments are likely to grow in proportion to the Consumer Price Index. You’ll be able to afford the same lifestyle regardless of the rising price of goods if your money is growing in tandem. Saving your money instead of investing it will mean that, in five years, the same amount of money will buy fewer goods. Most investments earn compound interest, which means that the value of your initial investment or the asset you invested in increases exponentially over time. Wealth builds through compounding because the growth is not linear, and you can reinvest your earnings so that their value continues to compound. For example, if you saved $50 a month for 20 years instead of investing it, you’d end up with $12,000 after 20 years. If you put $50 a month in an investment that earns 10% annual interest, compounded annually, you’d end up with $34,700 after 20 years. Build wealth to gain control of your personal financial roadmap. Investing prevents you from stressing about a fluctuating economy that’s beyond your control.

If you have a more goal-based outlook on finances, then investing is important because it creates wealth. It enables you to establish a financial legacy that you and your future relatives can benefit from. Creating generational wealth hasn’t always been possible for every demographic because the discrimination of the past made the financial playing field unequal. Political progress has somewhat leveled the playing field in certain ways, and there are now opportunities to invest and create wealth that will last for your lifetime and for those that come after you. Investing in assets is also important because growth often translates into an investment in yourself. An example of this is investing in an education policy for yourself or your children. You’re setting a goal to fund your college education with your investment, and this is an investment in yourself and in your financial future because you’re likely to get a better-paying job with a college degree.

Retirement is the most popular reason that people choose to invest. Everyone wants that sense of security that they can live out their golden years comfortably without being stressed about their finances after they leave work. The age of 65 might seem far away, but the Financial Independence Retirement Early (FIRE) movement has caught on, especially among young adults. The movement suggests that anyone can retire by the age of 45 if they’re able to save at least 25 times their monthly living expenses. The FIRE lifestyle means striving to save as much as 75% of your income per month from reaching your retirement goal as fast as possible. Even if you choose to invest for your retirement gradually instead of aggressively, like with the FIRE movement, it’s essential to have a retirement investment strategy at the outset and to work steadily toward it.

Lastly, investing benefits your overall mental health as you progress in your career and in life. It will give you peace of mind knowing that you’ll always have a nest egg to fall back on if something unexpected happens or that you’ll have assets to fund your lifestyle in the future. Investing to work toward paying for an asset like a house also gives you a sense of achievement, which is important for your self-worth and self-esteem.

Investment Options

Investing is not a “one size fits all” concept, and what works for one person won’t work for another. Your investment choices will depend on your financial goals, reasons for investing, the amount you’re investing, and the amount of risk you’re willing to take on. As a beginner investor, it would be best to start simple and build up investments like cryptocurrency so that you get comfortable with your own financial habits and boundaries. In Chapter 5, we’ll explore other asset investment options in more detail. These include investing in real estate, stocks, bonds, mutual funds, and exchange-traded funds.

For now, consider starting your investment portfolio with any of the following investment options, if you haven’t already:

●     Employer retirement plan, or 401(k): This is one of the most passive ways to start your investment portfolio. A percentage of your paycheck goes straight into the retirement fund your employer partners with before your salary reaches your bank account and before your paycheck is taxed. It’s common for companies to either match or contribute a percentage of what you decide to put into your 401(k) each month. Opt for an Individual Retirement Annuity (IRA), where you pay your contribution to a private pension fund if your employer doesn’t offer a 401(k). Some pension funds allow you to contribute as little as 1% of your income, but you should put in as much as you can to plan for retirement.

●     Robo-advisors: These algorithm-based applications automate the entire investment process for you. They’re a good place to start if you have a small initial investment amount and don’t have much time to dedicate to monitoring your investments. Robo-advisors are also a low-risk way to learn about investment trends and market fluctuations because they usually only require about 0.5% of your bank balance to open an investment. A robo-advisor will determine what kind of investor you are through surveys and decide how to invest your money on this basis. You also have sight of what your investment portfolio is made up of and how your funds are distributed.

●     High-yield savings account: In the traditional sense, saving your money instead of investing can result in your money remaining stagnant instead of growing. However, opening a high-yield savings account is a great way to earn some interest on money that you want to be able to access quickly via your bank account. Be sure to shop around for the best interest rate that your bank can offer before locking in your investment. These types of savings accounts can be especially helpful when an expensive emergency creeps up on, like your car needing repairs or unforeseen vet bills.

The Importance of Diversification

You might have heard that the key to being a financially successful investor is to diversify your investment portfolio. At its core, diversification means that you don’t put all of your eggs in one basket and hope for the best. The eggs in this analogy are your investment assets, and the basket is the market you choose to invest them in. The main benefit of a diverse portfolio is that your investments are spread across different assets, asset classes, and/or markets. This makes your potential return on investment higher and lowers the risk of your portfolio falling victim to market fluctuations. Financial markets are inherently unpredictable or volatile. Changes in trends, prices, and public interest in the asset on the market could cause the value of your asset to increase above your investment amount or drop below your purchase price. Diversification can be likened to a childproof safety net over a swimming pool. If you only spread the net halfway across the pool, there is still a risk that a child could fall into the pool. If you spread the net evenly across the entire pool and secure it properly, a child might wander into the pool, but the net will be strong enough to prevent them from falling in. A secure portfolio that is spread out just right is the best way to balance out and safeguard your financial investments.

To further explain the risks of failing to diversify your portfolio, let’s look at an example. You make the smart decision to invest in an apartment in a middle-class suburb to generate rental income. A year later, you decide you want to build your real estate portfolio, so you buy another apartment in the same area. The area or state experiences a financial downturn, and the real estate market is no longer booming. Your apartments are both suddenly worth less than the price you paid for them. Conversely, if you bought the apartment and then a year later decided to diversify and build your portfolio by investing in Amazon stocks, your portfolio would be partially protected from the financial downturn in the suburb because you’d still have the stock investment. Diversification can therefore help your portfolio avoid or survive market-specific risks (e.g., the real estate market) and asset-specific risks (e.g., shares in Amazon losing value because of bad publicity about the company).

You can diversify your portfolio by investing in different types of assets. For example, you could buy a piece of real estate, a few stocks on the Nasdaq Stock Exchange, and put some money away every month into an interest-bearing savings account. Diversification by asset class is also possible within the same type of asset. For example, you could invest in publicly listed companies with high-value stocks like Apple and Amazon and then buy stocks in private market companies to safeguard your investments from losing value at the same time if the market fluctuates. A drop in the value of the higher-value stocks might cause the value of the lower-value stocks to increase. Another way to diversify is to invest across multiple markets to take advantage of international trends and safeguard your portfolio. For example, you could invest in real estate in your home country and in another country to ensure that your portfolio stays balanced even if one market takes a downturn.

Doing your research on the assets, markets, and trends of the investments you’re considering is the best way to make informed decisions about diversification. Too much diversification can increase your portfolio’s risk level because it can become unmanageable to keep up with too many different market trends. It’s impossible to predict exactly when things will happen in a market, so your portfolio should be balanced enough to withstand these sudden dips and rises.

Failing to sell your assets at the right time can also be bad for your portfolio. Choosing to hold onto an investment that is likely to lose value in the near future can impact all of your investments. Get comfortable with letting go of wealth or cutting your losses to open the door to new opportunities. Your focus should be on evenly spreading out your investments to spread out your wealth. Make sure you’re comfortable with the level of risk you’re taking on as you diversify and that you have enough time to properly manage your portfolio. Understanding why a diverse portfolio is essential to grasping the fundamentals of cryptocurrency, which we’ll cover in the next chapter.