Investing for the first time with a small budget

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Doing something for the first time is always scary and interesting at the same time. You are not sure if what you are doing is risky or not. This is what it feels when you start thinking about investing for the first time with a small budget.

Let us clear the air out, you may have come across some adverts on social media for pyramid schemes – that is not investing! There is also a confusion between saving and investing – the two are different. When you are saving money, you are setting aside money in a more secure account for future use. When you are investing you are buying an income generating asset with an expectation that the asset will grow in value or rather work for you. Investing money is mostly for long term goals and the risk of losing it is higher.

Moreover, it is important for us to distinguish between trading and investing. Investors are interested in the long term growth of their wealth but traders are looking to profit from the changes in the prices of the financial assets. Now you know the difference, it is now easier to follow through.

Understand yourself before investing

Before you start investing for the first time you need to understand your needs. How can you describe your level of risk? Are you the type of person who can break the television because your favorite team lost a match? How well can you handle losing money? Are you the type that can hop from one investment to the other? If you are comfortable on taking risk, then you can go for risk investments but I encourage you to start with a low-risk investment. As you become confident in investing, you can create a portfolio with risk assets.

Furthermore, as an investor, you are looking for an investment that gives you positive return. There is usually a trade off between return and risk. If you put your money in a risk investment, you need a sort of compensation for that. That is, the higher the risk, the higher the expected return. It is rare (just like finding a diamond in your backyard) to find a low risk investment that gives you a high return.

Investing requires you to define your goals

Are you that person who just follow others to do something you are clueless about? Are you sure you will not blame others if you lose money on your investment? Before you can entertain the idea of investing for the first time with a small budget, have a well articulated goal or vision. The bigger the size of your goal, the bigger the amount you need to invest. Wait a minute, for a second I almost forgot your budget is constrained. No problem. You can still invest the little money you have but now we need to balance things out by investing over a long period of time.

In addition, if your goals are short term, it may be wiser for you to consider putting your money in a savings account. Let us suppose you want to buy your mom a diamond necklace for her next birthday. It may not be a wise idea to invest that money. You do not want to be in a situation where you can not have the money at the time you need it.

Moreover, let me emphasize on this golden rule: Invest what you are willing to lose! This is very crucial if you want to enjoy your investment journey. It is good to understand that even though you may be knowledgeable about your investments, the future is not certain. Great investors sometimes lose money despite the fact that they are good at their game. To avoid unnecessary drama or stress, only invest what you are willing to lose. I encourage you to split your money into two portions. Invest the first portion that you are willing to lose and save the second portion you can not afford to let go.

Research before you start investing

This can not be taken lightly. You need to understand how you will get your returns from your investment. Does your investment pay out interest or dividends? Are you investing to capitalize on capital gains only? Return on capital gain is the income that you gain when your asset appreciates in value. Note that you only benefit from this return if you sell your asset.

Furthermore, it is of paramount importance to know how liquid your investment is. You do not want to be stuck with a toxic asset that is losing value only because no one wants to buy it from you. If your investment is liquid enough, it can be traded easily.

In conclusion, investing for the first time especially with a small budget can be daunting but it can be fun. You need to understand the type of person you are in terms of your risk tolerance and expected return. Your goals need to be properly set and they need to be realistic. Combining all these with a good research can transform your first adventure into a cherishable experience.

My post about investing before paying off debt may be useful if you are still struggling in debt. The post about building habits of saving and investment is helpful if you are still trying to establish a good attitude towards money.