It's never too young to save and invest. People who start investing when they are young tend to develop this habit until the end of their lives. The sooner you invest, the more money grows over time. To get additional money for investment capital, you can start your own business. Everyone can find money to invest if they analyze and change their spending habits.
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Part 1 of 3: Learning the Basics
Step 1. Start early
If you want to grow wealth, timing is a very important factor. The longer you save and invest, the more likely you are to achieve your goals and build great wealth.
- You can set aside more money to invest in the long term, rather than in the short term. This is perfectly logical, but many people don't appreciate the effect of time on growing wealth.
- For example, if you can save as much as IDR 500,000 per month, you should start at the age of 5 years (assuming someone has already set aside money for you). At the age of 65, you already have IDR 360,000,000 (IDR 500,000 x 12 months per year x 60 years), or (IDR 500,000 x 12 x 60 = IDR 360,000,000). This figure does not include the return on the money invested.
- If you start saving at the age of 50, you will have to save IDR 2,000,000 per month to reach the same figure (IDR 360,000,000) at age 65 (IDR 2,000,000 x 12 x 15).
- If you invest early, you will have the funds to cover investment losses that occur in a given year. Investors who start late do not have much time to cover investment losses. Time will allow your investment to recover its value.
- The Standard and Poor's (S and P) 500 is a large 500 stock index. From 1928 to 2014, the annual rate of return was 10%. Although in certain years the rate of return is negative, people who invest for a long time tend to benefit from holding this stock index.
Step 2. Try to save as often as possible
The frequency of contributions (weekly, monthly, or yearly) has a huge impact on your long-term success.
- Saving is the process of transferring funds to a separate bank account. You distinguish between a savings account and a personal account.
- This process helps ensure that you are not spending money that you want to save. Then, you invest into a savings account into deposits, stocks, bonds, etc.
- The more you save, the less you can deposit each time you make a contribution. This will make it easier to match each investment to your personal budget. From the example above, since the age of 5 years you can save IDR 125,000 per week (assuming each month consists of 4 weeks). You can save IDR 500,000 per month or IDR 6,000,000 per year. Your total investment will remain the same. Your burden is lighter if you save little by little as often as possible.
Step 3. Use compounding when investing
Once your funds are deposited, use them to invest as soon as possible. You will get a higher return on investment. Compounding benefits when you turn your savings into investments.
- Compounding will accelerate the growth of your investment, much like the snowball effect. The longer the snowball rolls, the faster it will grow. Compounding works faster the more you invest.
- When you compound an investment, you earn "interest bearing". Over time, you will earn interest income from your initial investment and previously earned interest income.
Step 4. Use a dollar cost averaging strategy
As the S&P example alludes to, index values can be higher or lower in any given year. However, over time the index has produced an average return of about 10% per year. You can use dollar cost averaging tactics to take advantage of short-term declines in investment value.
- When you invest using dollar cost averaging, you deposit the same amount of money every month
- The dollar cost averaging strategy is usually used for investing in stocks and mutual funds. Both investments were purchased in the form of shares.
- If the value of the stock drops, you can buy more shares. Say, you invest IDR 5,000,000 every month. If the share price is IDR 500,000, you can buy 10 shares. If the share price falls to IDR 250,000, with a capital of IDR 5,000,000 you can buy 20 shares.
- Dollar cost averaging can reduce your cost per share. Because stock prices increase over time, lowering the cost per share can increase earnings.
Step 5. Let your investment grow
If you invest in bonds, compounding occurs in the multiplier effect for interest against interest. In stocks, compounding is the gain from dividends previously received. In both cases, you must invest all the interest or dividends earned.
- Time and frequency are also very important. You can receive and reinvest profits more often if the frequency of compounding is also greater. The more often this happens and the longer you let it happen, the stronger the impact will be.
- For example, let's say you start investing IDR 1,000,000 per month from the age of 25 with an interest rate of 6%. At the age of 65, you will have invested IDR 480,000,000. However, in reality the money invested grows to almost IDR 2,000,000,000 if you compound interest every month over a period of 40 years.
- On the other hand, say you waited to start saving until you were 40, but invested $2,000,000 at an interest rate of 6%. At the age of 65, you have invested Rp600,000,000. However, you don't have much time to compound interest each month. As a result, you only have IDR 1,386,000,000 for retirement (instead of IDR 2 billion in the previous example). The amount of savings deposited each month is indeed greater, but the end result is less due to the lack of compounding time.
Part 2 of 3: Understanding Saving and Investment Options
Step 1. Use a savings account or deposit your funds
A savings account allows you to access your savings at any time with very low risk. However, this option offers very low interest rates. Deposits offer somewhat larger returns, but are less flexible. You have to deposit money in the bank within a certain period of time, starting from monthly to yearly.
- This investment has several benefits. Both are easy to make, and are usually insured by a government agency. This means that both of these investments are very safe.
- The drawback is that the flowers are produced very little. Without high interest, you don't earn a lot of compound interest. As a result, time deposits and savings accounts are only suitable for investments of small amounts and short periods of time. Both can increase as a savings vessel when interest rates are high.
- Banks or small credit companies will sometimes offer high interest rates to attract customers from larger companies.
Step 2. Buy government bonds or municipal bonds (municipal bonds)
When you buy bonds, you are lending money to the government or local government. You can also invest in bonds issued by companies.
- Bonds pay you a fixed amount of interest each year. You can reinvest the interest earned to buy more bonds and create a compounding effect.
- Your initial investment (principal) deposit and interest are based on the bond issuer's credit rating. Government and local government bonds are usually guaranteed by the tax that the issuer collects so the risk of this investment is very low.
- Corporate bond payments are based on the company's creditworthiness. Companies that consistently generate profits will have better credit ratings.
- You can buy bonds through a bank, or a financial advisor.
- Bond investing also has its drawbacks. When interest rates are low, the returns received are small. Even in times of high interest rates, bonds usually offer smaller returns than stocks. However, the risk of bonds is usually less than stocks.
- The average return on bonds since 1928 (with compounding) is 6.7% per year, compared to stocks that can reach 10%.
Step 3. Buy shares
When you buy shares, you become the owner of the company. Stock investors are also known as equity investors. Investors buy stocks to earn dividends and profit from rising stock prices.
- Stocks offer better returns than most other types of investments. While stocks offer higher returns, they are also higher risk. The longer you invest in a stock, the more time it will take to recover from a drop in stock price.
- If the company makes a profit, some of that profit can be distributed to shareholders as dividends.
- You can buy stocks by opening a brokerage account. You will be asked to complete a new account creation form. If your account is ready, you can deposit funds and buy shares. Consider using the services of a financial advisor to invest in stocks.
Step 4. Invest in mutual funds
A mutual fund is a group of funds from various investors. Funds are invested in securities, such as bonds or stocks. A mutual fund portfolio can generate interest income or stock dividends. Investors can also earn profits from the sale of securities.
- Mutual funds can be opened and managed easily. Investors deposit money to fund managers. You can add investment regularly and reinvest the profit, if you want.
- Mutual funds allow you to invest in a variety of stocks or bonds. Thus, your investment is somewhat safe due to diversification so you don't go bankrupt because the price of some stocks falls.
- Most mutual funds allow you to invest with a small initial deposit and increase your investment little by little periodically. If you don't have a lot of funds to invest, this is quite important. Some mutual funds allow you to start with IDR 10,000,000 and increase it by IDR 500,000 to IDR 1,000,000.
Part 3 of 3: Increasing Investment Capital
Step 1. Consider starting a business
If you work full time, your income can be supplemented by a part time business. Use the extra income to increase your monthly investment. By increasing your investment, capital can be obtained faster.
- Take small jobs. One of the new business trends is hiring employees for small, specific tasks. For example, the author can review the resume of a job applicant. Because the time needed to complete the project is only short you can take this job to increase income.
- You may even be able to take on enough work that it eventually becomes your full-time job.
Step 2. Turn a hobby into a business
If you are passionate about a hobby, try turning it into a business. For example, say your hobby is surfing.
- If you're proficient enough, you might be able to find a way to solve other people's surfing problems based on your experience.
- Successful business products and services solve problems for customers. Ask about problems other people have surfing. Maybe you can find a solution.
Step 3. Take your personal spending habits seriously
If you don't create a formal personal budget, you may be wasting money that could otherwise have been invested. Create a budget with all your income and expenses.
- View your variable expenses each month. Some expenses, such as car payments and home mortgages, are mandatory (aka fixed expenses). Other expenses are variable expenses.
- Review spending on entertainment in a month. Say you spend IDR 3,000,000 to go to the cinema and eat at a restaurant. Set aside as much as IDR 1,000,000 to invest. If you invest regularly every month, it will help you grow wealth in the long run.
