Five financial lessons I learned this year
If someone told me just over a year ago that I would be writing about money, I would have thought...
The Wizard of Oz was released in 1939; and the phrase ‘there’s no place like home’ marked its place in history. Fast forward to today and most millennials are moving flats annually and the idea of having enough money for a home of their own seems like a pipe-dream. Speaking from experience, I can assure you it’s not for a lack of wanting, but rather a lack of knowledge. Think of us as a generation of scarecrows looking for a wizard to give as a (financial) brain.
By wizard, I clearly mean Google. But the results for my search for some guidance were lackluster. Dare I suggest that there might be a question to which Google does not have the answer? Alexa wasn’t much help either. It seems that searching ‘millennials and investing’ will most likely only help you make a budget or pay off your student or credit card loans. But what about all those people that made the budget and followed it – what next?
Our millennial money series is for those who have paid off their credit cards, made their budget and have an emergency fund. Those millennials among us who want the house and the ruby red slippers.
“Work smarter, not harder.”
Most of us are familiar with ‘saving’: putting some money aside – usually in a bank account – to use in the future, rather than spending it today. Investing, in its simplest terms, is just taking that one step further. Think of it like education: by sending us to school our parents are essentially investing in our education – in the hope that we will finish school more knowledgeable than we when we started.
Instead of putting the money into a cash account, an ‘investor’ will put their money into stocks or bonds or another ‘asset’ in the hope that it will grow over time: we’ll get out more money than we originally put in. The ultimate goal is to pay ourselves in the form of a house or an interesting retirement in 10, 20 or 30 years time – in other words, a happy ending.
A stock is also sometimes called ‘equity’ or a ‘share’. Businesses all over the world issue shares and investors can buy (and sell) those shares. You don’t own part of the company, as such – you can’t just walk in a take a desk or a computer – you own some of its shares and can vote on how the company is run.
By investing in shares, you can benefit from the growth of the company – the share price will rise and therefore so too will the value of your investment. However, if the company does badly and the share price falls, the value of your investment will fall too – it’s not a one way (yellow brick) street.
A bond is a bit like a loan. Only instead of you borrowing money from a bank, a government or a company is borrowing money from you. Just like us, sometimes governments and companies don’t have enough money for the things they want, or the things they want to do. We may borrow money to buy a car, a house or go on holiday. A government may borrow money to pay for more schools or hospitals. A company may borrow money to purchase another business, open another office or update its technology.
A bond is issued by that government or company and, buy buying that bond you are agreeing to loan them the money in return for a fixed interest payment over a certain amount of time. While bonds are deemed to be less risky than stocks, they still carry the risk that the government or company will default: that they won’t be able to pay the interest or that they won’t pay back the original loan amount.
With literally thousands and thousands of stocks and bonds to choose from, picking one or two to invest your hard-earned cash may seem too much. That’s where an investment fund comes in.
An investment fund pools together different investors’ money in one big pot. It is run by a professional investor who will have the techniques and experience to research all the stocks or bonds on offer and decide which ones they think have the best prospects. So instead of buying shares of a company, investors in a fund are buying shares in the fund.
Investors can add or take away money from the pot when they choose. The fund will calculate its price – often daily – based on what it owns and how many investors it has.
The advantage of investing in a fund is that not only is a professional making the difficult decision for you, but it allows you to buy shares in lots of different companies rather than just one or two – your money is spread further. This ‘spreading’ is referred to as ‘diversification’ in the investment world and it essentially lowers the amount of risk you are taking.
I won’t lie, investing is complicated and confusing at times but that doesn’t mean it has to be hard or impossible. Remember: ‘work smarter not harder.’ It can also be very rewarding both from an academic and financial point of view – if you’re willing to put the time in.
At FundCalibre we know there is a gap in financial knowledge, so we’re hoping to educate millennials about the world of investing to create a confident, well-informed, next generation of investors. Before you think we’re up on a soap box, millennials aren’t just 18 year olds – they’re statistically anyone born between 1981 – 1996 so the definition includes people in the mid-30s – people who have potentially already been working (and hopefully saving) for around 15 years! And to keep it real, this series is being written by millennials, for millennials, bringing our experiences to life so you don’t have to make the same mistakes.
These articles are for you so please send in any questions and topics you’d like to see explained without all the industry nonsense.