Atiqah Nadiah Zailani
Put Your Money To Work
'Money is a good servant, but a terrible master'. Pick the right side.
There are essentially three ways to go about becoming wealthy:
1) make more money (earn as much as you possibly can)
2) save more money (cut down on spending as much as you can possibly can)
3) grow the money (invest as well as you possibly can).
Most of us are automatically working on item 1: we continue building up our career, adding on work experiences, improving our skill set, and commanding higher pay in return.
Some of us are also working on item 2, slowly but surely building up our savings.
Few of us, however, seem to be working on item 3.
This does not count.
Are you investing your money?
If you’re putting your money in the bank and earning 3% interest, please don’t call that investing.
Inflation itself is slightly above 3%. You’re not making money - chances are, you’re either just breaking even, or you’re losing money, year after year after year. This is why just saving your money is not enough.
How inflation affects you, explained by a shopping cart.
Your home is NOT an investment
Some of you may disagree with this, but I also wouldn’t count your home as an ‘investment’. If you live in it, it means you’re not renting it out and you’re not earning income from it - in fact, you’re the one paying to stay there (mortgage, insurance, maintenance, taxes…etc). Yes, the house value may appreciate, but when the time comes to sell the house, the money is just going to pay for another house (because otherwise, where are you going to stay?). You may not even plan to sell because you want to stay there forever, in which case your house is a purchase, not an investment.
Investing means growing your money, which means putting it into something that will (hopefully) bring about bigger returns than the cost and inflation combined.
There are many ways to do this. You can:
1) Invest in existing companies or ventures that are profitable
2) Invest in funds or unit trusts that invest in existing companies or ventures on your behalf
3) Invest in properties (not your home) in hopes of appreciation or income from rent
4) Invest in building your own profitable business
The books that have been written to cover each of the topics above can fill up (and do fill up) entire libraries - the purpose of this post is not to go into them in detail, because it will never end. Different people have different risk tolerance, and they want different things with different timelines, so it’s almost useless to try and write a generic post about it.
What I want to do is to tell you about the biggest mistake I made that I hope you won’t: waiting too long to get started.
The never-ending quest for knowledge
Some of you might be thinking: “Wait, I can’t just start and throw my money at random investments! I can lose all of my money if I don’t know what I’m doing! I need to learn all I can first!”
While you should definitely learn about the different types of investments and how to go about making them, don’t fall into the trap of ‘forever learning but never doing’.
Just like riding a bike, you can’t learn investing from books, you actually have to do it. The learning happens on the job, not in the classroom. Are you going to fall every now and then and lose some money? Sure. But only by falling can you get better.
Also, let me save you the surprise: There will never be a point where you know ‘enough’ and are finally ‘ready’ - it’s a constant and continuous learning process, up until you die. Things change, markets go up and down, nations rise and fall, what is true now may not be true tomorrow, etc, etc, etc. You just have to keep learning and keep dealing with it.
I myself fell hard into the ‘forever learning but never doing’ trap. I studied and read about investing for THREE whole years before I even got the courage to get started, always thinking that I needed to read just one more article, just one more book, and see just one more documentary before I can be ready.
As a result, I lost out on three whole years of compounding magic.
The power of compounding
Compounding is basically like planting a seed.
If done well, that one seed yields you a healthy tree that produces fruits with hundreds of more seeds. When you plant those hundred seeds, more trees grow and produce even more fruits, and now you have thousands of seeds. And it goes on and on…
When your money makes even more money for you. Source: Fin24
The problem is, you actually have to plant that first seed to begin with. And the earlier you do it, the better it is for you.
The power of time
If you and I invested the same amount of money, but I started 10 years earlier than you did, I could end up with TWICE as much money as you do, simply because I had compounding magic working for me longer than you did.
In other words, my trees had a major headstart, even though you and I both started with one seed.
The early bird really does get the worm. Source: The Digerati Life
Think of it this way: the longer you wait, the more you lose out on the power of compounding, and the less money you make.
It also works conversely with debt: the more you wait to pay up, the bigger the hole you dig for yourself.
For you young ones, time is on your side
The previous chart above may make it seem as though investing money is just one smooth ride to the top, but it’s really not. It’s more like this:
If you are in your twenties, or even better, still struggling with teenage acne, the odds are tilted in your favour. In the words of Five For Fighting, you’ve got “time to buy and time to lose”. Since your timeframe is so long-term, you can ignore the frequent fluctuations and the daily ups and downs. In the grand scheme of things, they don’t matter to you. If the market crashed tomorrow, you still have 30+ years to recover.
In addition, your twenties and early thirties are when you are able to take the most risk. This is when you are most flexible with your lifestyle and can change it to suit your situation. This is before the spouse, the kids, the diapers, the university bills and all sorts of adult obligations invade your life and hitch themselves onto your back. So if you fail and lost a large chunk of money tomorrow, the only one affected is you. No big deal. You can rebound again.
This no longer holds true when you start getting into your 30s, 40s or 50s. Not only do you have a shorter time frame to grow the money, you can no longer afford to take risks. You have bills to pay, mouths to feed, children to put through school… losing a chunk of your money is a big, big deal now. If the market crashed tomorrow, you’re in major trouble. At this age, your focus shouldn’t be in growing money, but in protecting it.
This is not to say that you shouldn’t be investing during old age - the point is to not wait until you get old to start investing! So if you’re young, take advantage of that and get started already. Time is on your side.
Side Note: Muslims & Riba (Usury)
Being a Muslim, I thought I’d include a note on the kinds of investments that are suited to the Islamic values which abhor ‘riba’, or usury.
There is a lot of debate among the Islamic scholars on what counts as usury and what’s actually permissible, and I am not qualified to talk much about it, but I thought I’d share how I personally go about it in general.
Usury is anything that 1) guarantees you profit 2) at the expense of another and 3) through no effort on your part.
By the above definition, interest rates earned from giving loans is not permissible, because:
Violation #1: you are guaranteed a certain amount of profit - even if the business that loaned money from you failed, you’d still get your %. Islam advocates risk-sharing, but in this case, you took on none of the risk but still got paid.
Violation #2: the person who borrowed $1 now has to pay $1.15. The extra $0.15 was created out of thin air at the expense of the borrower, who has to repay an amount significantly higher than what he initially took.
Violation #3: You did nothing to earn that 15 cents.
By extension, interest-bearing savings accounts, bonds, and shark loans should be removed from your list.
Interest-ing. Source: The Daily Blog
So what’s left?
Well, any instrument in which you:
a) take on the risk (that the company may fail, or the market may crash, or the house value may not appreciate)
b) do not impose exploitative interests (you are not lending out money and earning interest)
c) have to put in effort to manage and profit from (by managing your shares, or the company itself, or the property’s upkeep)
are fair game. That includes stocks, properties, and businesses.
Then there is also the Syariah compliance, which basically means avoiding investments that are related to things considered harmful in Islam, namely weaponry, alcohol, non-halal items or entertainment, so on and so forth.
I won’t be able to tell you if this or that specific investment is okay or not - that is not my place - but I do believe that you yourself will be able to arrive at an answer by understanding how that particular investment works, how profit is generated, and then comparing it to the definition of usury above.
Let's make money, but let's also do it the right way!
THINGS FOR YOU TO DO RIGHT NOW:
1. Open up a web-browser and Google ‘How to Invest’. Read at least 5 of the articles that come up.
2. Pick one type of investment instrument you’ve heard of, and buy or borrow a book about it. You may not end up liking it, in which case you can move on and do the same thing with another type of investment instrument.
3. If you’re going into stocks or unit trust/mutual funds, start small (~$1,000) and go from there. Increase the size of your investment as your understanding improves and as you get more and more comfortable with it.
4. If you’re going into property, you won’t be able to start small, as the downpayment alone would range from $20,000 and above, and you may have to contend with loans and lawyers. Read up as much as you can and talk to experienced homeowners or buyers - this is the only instance in which it’s okay to take your time. Properties are not liquid, and the negotiations and transactions can drag for months - if you make a mistake or change your mind, it will not be as easy to save yourself. So yes, do your research, crunch your numbers and think very, very thoroughly.
5. If you failed, or lost a bit of money, don’t be discouraged. Remember the bike analogy – you need to fall in order to get better. Find out what went wrong, learn from it and keep practicing.
NEXT... just kidding. This is the end of the basic Things I Wish You Knew About Money. Thanks for following the series - I hope you found it useful in helping you rethink how you deal with your money.
I may write about more advanced stuff later in the future (debt, insurance, investing in more detail, how to manage your money automatically, etc). Subscribe below to be informed when that happens, and tell me if you want to know more about a specific topic!
Edit: Read the intermediate series: More Things About Money I Wish You Knew!