Posted By
By Devin Partida
Special to Financial Independence Hub
Today’s economic and job-growth landscape might have you turning to investing as a prominent option.
It takes patience and effort, but anyone can save up enough through intelligent investments.
How do you begin the Investment Process?
As of 2023, the average American makes around US$57,000 annually, which is lower for minority groups. Even if you’re careful with your spending, becoming financially independent with that salary can take a long time.
The average person from the United States only has about $5,000 in savings. Before beginning the process, you must consider how much money you can invest. The ultimate goal is financial independence [aka “Findependence” on this site], but getting there can take a while. Only put in what you’re willing to lose because things might not pan out as expected.
The formula for Findependence takes your yearly spending and divides it by your safe withdrawal rate to calculate your goal savings figure. Then, it subtracts the amount you’ve already saved and divides that amount by how much you can save each year. It’s only an estimation, but it can help you know how much your investments need to make.
What Investments should you Consider?
There are plenty of investment types. The stable ones often have lower returns and you usually need to take some risk to see a high reward quickly.
1.) Real Estate Investment Trust
A real estate investment trust (REIT) receives money from investors to purchase and manage property. Most generate revenue through rental income and pay dividends in return for the initial payment you made. It’s similar to owning by yourself, but you pool funds for the purchase and let someone else take care of the tenants. There are also other REIT types, so you have more options than rental properties.
2.) Stocks
The stock market usually requires more attention to detail because you must keep up with it. Anything from an upcoming brand deal to an overseas political event can affect this investment type. You should frequently check the stocks you hold and the businesses they belong to so you can quickly respond to changes.
The Canadian stock market differs from the United States version. Firstly, you need a brokerage account. Most brokerages charge about $5 to $10 per trade, with average commission fees of $6.95. It might seem minor, but paying to invest or shift your stocks around puts you at a loss before you begin. The flat rate cut you must pay can also make investing smaller amounts challenging because it takes a higher percentage the less you put in.
3.) Cryptocurrency
Although cryptocurrency carries more risk, you can get significant returns if you’re careful and invest wisely. The blockchain has a hashing system and verification protocols to ensure the authenticity of transactions. Since most cryptocurrencies rely on it, they’re relatively secure.
Although you might be familiar with bigger names like Bitcoin or Dogecoin, you should research before putting your money into them. The initial cost and return on investment vary widely for every cryptocurrency.
Cryptocurrency is still a relatively speculative investment to make, and experienced advisors recommend making minimal investments. If you’re playing it safe, you should keep cryptocurrency investments to around 1-2% of your total portfolio.
4.) Mutual Funds or ETFs
When investors pool their money and put it into many different companies, it’s called a mutual fund. It’s similar to stock trading, but the diversified portfolio may make it a safer option.
You can choose from two types. The active one involves someone managing which securities to put money into. Another name for the passive fund is an index fund because it tracks a major stock market index like the S&P 500 or Nasdaq. However, you should know brokerages typically charge annual fees for their service.
Exchange traded funds (ETFs) are also a safe diversified option, similar to mutual funds. The main difference is that the price of an ETF is based on market price and can only be sold in full shares. Mutual funds are sold in dollars, meaning you can choose the actual amount you’re interested in investing.
What Factors should you Budget for?
Consider budgeting using the 50-30-20 rule, saving half of each paycheck for needs, 30% for wants and 20% for investments. It may be wise to switch up the last two percentages and put more in savings, though.
Consider budgeting for these factors:
● Savings: Carefully choose the amount you’re comfortable investing. There’s always a possibility you won’t see high returns at first.
● Emergencies: Have some extra savings as a safety net. Some investment types won’t allow you to pull your money out in the case of an emergency.
● Debt: Canadians have $100 billion in credit card debt collectively. Monitor your credit score and pay off the principal on top of any interest.
● Bills: Budget wisely so you have enough for your necessities. For example, rent in Canada has increased 12% from 2021 to 2022, with the average rate sitting around $2,000 per month.
● Wants: It’s okay to have some money on the side to use just for fun.
Budgeting can help you invest as much as possible, leading to financial freedom.
Invest toward Findependence
You can become financially independent if you make intelligent investments and budgets. Cryptocurrency, a mutual fund, stocks or a real estate investment trust all have different risks and rewards, so consider each carefully.
Devin Partida is the Editor-in-Chief of ReHack.com, and a personal finance writer. Though she is interested in all kinds of topics, she has steadily increased her knowledge of the intersection of finance and technology. Devin’s work has been featured on Entrepreneur, Due and Nasdaq.
