A Basic Guide for Income Investing

The word ‘investing’ might sound intimidating, but it doesn’t need to be. You can start investing to increase your income today, with as little as one cent. But, you need to know the basics first.

If you’re wanting your money to work for you, and you’re thinking about investing, congratulations! You’re taking a step in the right direction to creating a secure financial future. Before you begin, there are some basic things you need to know; but once you do, you’ll be surprised how easy it can be to invest, and how low the financial barriers are.

As with all forms of investments, there’s no guarantee of income though—there are lots of variables at play.

Why Should You Invest?

You should invest because interest rates in traditional bank accounts are low. If you leave your money in a savings account, you’ll be lucky to make 3% interest. Couple poor returns with higher than normal inflation; the real purchasing power of your money is likely to get worse over time not better. But, if you invest it, even in a conservative fund, you’ll likely make more than this. You can make your money work for you.

Investing not only slowly grows your income, but if it’s done right, it’ll also provide you with capital growth. E.g. If a share increases in price, you can sell it for more than you purchased it for.

So how do you get started, and reap the rewards of investing?

Choose Between Active or Passive Investing

There are two types of investing, and they are very different in terms of time and knowledge required.

Active Investing

This is when you research investment options regularly, build, and maintain your own portfolio. You’ll need lots of time to research- you’ll be keeping an eye on the stock market, scouring the business news to find investment opportunities, and then monitoring the organizations once you invest. As the focus is on earning an income (as opposed to long term capital growth) your decision making will likely be influenced by short to medium term performance. For example, if you foresee a terrible quarter, you might decide to take your money and reinvest somewhere else. You’ll also need to understand a bit about the financial markets and how to analyse them; is this a bull or bear market?

While this takes a lot more time, the opportunities to win (or lose) are big. You can make risky investments that end up paying off big, maybe the next Google, Apple, or Amazon.

Passive Investment

This is when you put your money into an investment fund and leave it alone.  While you’ll need to research the fund or investment manager, it’s very much set-it-and-forget-it. You literally don’t have to think about it once you choose a fund and length of investment.

One thing to be aware of is that managed funds may also be active or passive and for all the extra work involved in looking after an active fund, research has found that passive funds perform equally as well (and in some cases better) than passive funds in the long term.

Once you’ve established which method of investment you prefer, it’s time to consider your budget.

Decide How Much Money Do You Want to Invest

If you want to, you can invest on an app like Sharesies, and start with almost nothing. Got an extra $10 here and there? You can add as you go. This is a great way to build up a portfolio if you don’t have a big sum of money to start with.

Many investment funds do have a minimum requirement, but sometimes it can be pretty low. Bigger funds might have a minimum or $10,000, but that’s just something you can aim for in the future. An example of a low bar to investment is with Simplicity. They will create an investment account for you using as little as $1,000, and there’s no minimum contribution once you’ve opened an account.

One very important thing to consider before channelling all your money into investments is ensuring you have the provision of an emergency fund. You need to have three to six months’ worth of expenses tucked away in an accessible manner—it needs to be available to withdraw quickly in case of emergency. You don’t want to have to be forced to withdraw investments at short notice, as you may sell at a bad time and could lose money.

Also, think about any debts you currently have. If the interest rate on the debt is higher than the return you’re getting on the investment, focus on paying off the debt. Average returns on the stock market in NZ are about 9.4%. If you’re paying 20% on that credit card, you’re losing money on that choice. Bid farewell to your high-interest debt before investing.

Decide What Your Risk Tolerance Is

No matter how much of a ‘sure thing’ an investment is, there are no guarantees. Each investment has its own level of risk, and this is often correlated with returns. You risk big to win big.

If you don’t mind taking financial risks, you’re comfortable with weathering fluctuations in share prices, and you’re OK with investing in slightly more speculative stock, you will find that more aggressive funds will suit your investment style.

If you prefer slow-and-steady-wins-the-race, then low risk investments should be your go-to. There’s a wide range of options to choose from, regardless of your comfort in risk.

Lower risk examples

  • Blue chip stocks such as Apple
  • Government stocks and bonds
  • Mutual funds
  • Property

Higher risk examples

  • Corporate bonds
  • A just-listed company
  • Low-value shares
  • Currency trading

Once you’ve decided:

  1. If you’re an active or passive investor
  2. How much money you can invest
  3. What risk tolerance of investments you’re comfortable with

you can start your journey. You can begin and learn as you go, or contact Sam Kodi to chat about the options you have, and what would work best for you. Whatever route you decide to take, this is a fantastic opportunity to create a financially free future.