In the introduction we said that investing means, very simply, to let money work for you, in your place.
But looking at the matter from even an higher point of view, we can ask: “How many ways there are to make money?“. The answer is still very simple. The methods are only two.
“People at work” or “money at work.”
As you can see, we are already working on the second one. But to give a complete picture we need to say a few words for the first method too, and perhaps these few lines would be the most important to allow a real change in the financial life of every person.
Working for investing
“People at Work” essentially means that the work of people creates value, which is then turned into money, both in the case of an employer who makes other people work, both in the case of a employee who is paid for his work.
If you are like most people, as almost all of us are, you are an employee of an employer, either the state or a private individual, that every month pays you the hours of work that you have done for him .
At that point, what do you do? You take that money, you go to the bank and you pay the mortgage, you go to the car dealer and you pay the car, you pay the expenses of the home, you pay the debts, you pay for medication, and maybe you also pay your child the pocket money. At the end of the month there’s practically nothing left, but there it comes a new salary and the cycle begins again.
But what is the meaning of all this trivial speech? The reason for these words of mine is that I want to pass you the concept of
You may have noticed that in the payment list there were almost everyone, they only missing were was you. Because here it’s the fact: the most important thing you need to start doing from now on is to pay yourself, and not as last, but absolutely as first.
What does it mean? It means that the first thing to do, whenever you get the money you earn through your work, is to take a part of it and put it aside. The best method is to open another bank account and transfer there the sum every time. But it’s important to do it right away, because the most important person in your financial life is yourself, and paying you first every time is the most sensible thing you can do.
Doing it at the end of the month, when you’ve already beared all the other expenses, becomes more difficult and exhausting. In addition, scientific experiments have shown how it’s easier for people to set aside a sum at the beginning and then live with the rest, rather than living knowing that you have that sum to be saved at the end of the month.
So, do it immediately. To pay yourself first every time is the most important step to obtain those resources necessary to aim at your financial freedom, a freedom that can be achieved just through the investment practice.
Investing for not working
Going back to the introduction, at this point, many think they have to work and pay themselves many years before they can have enough capital to invest, always convinced that for investing big capitals are needed.
As we have already said, this is absolutely not true. And also, investing a sum each month, even if small, can lead to great advantages over those who invest all at once. Let’s make an example to better explain.
Let’s suppose you and a friend decide to invest in the shares of a large company you believe a lot in. Your friend invests all his capital and buys all the shares he can, given the share’s price at that time.
You instead show a bit of sense, and you decide to buy shares in packages, each month, with fixed capital payments. What happens? It happens that, since share’s prices don’t just go up, but sometimes also down, in some month you end up buying shares at a cheaper price compared to your friend, in some month instead not.
It has been shown that by buying in this way, statistically you will end up having more shares than your friend who instead bought them all at once.
Even in the case of a trading strategy this system works very well. The ups and downs of a strategy are comparable to the ups and downs of the price of a share or a financial instrument. In simple words, to give new funds to the strategy in installments over constants period makes sure to spread and optimize the risks over a long time period, in order to obtain a greater benefit.
The evolved worker
Now you’ve finally clear the sense of this lesson. Work and pay yourself first each month allows you to do three things.
- To be always sure to capitalize your manual labor, so you don’t lose all your earnings by paying others.
- To start making money in the second way, ie letting money work for you.
- To gain advantages over time, acquiring at the best prices statistically the new units of your investment.
Now, we have the two main instruments, human labor and money, ready to let us gain other money. In the next lesson we will look at the third and last component, ie the concept of compound interest.