Often, when I talk to people about investing in the stock market or other assets, I get the answer that they either do not have enough money to start investing, or that they cannot invest more of their money, because of their personal obligations and living expenses. And I can clearly understand that it is difficult enough for many people to save money on an emergency fund instead of investing it. Nonetheless, I think there are some common misunderstandings about investing in the stock market and I would like to provide some thought-provoking impulses to you, that might help you to save and invest more money in the future.
Investing does not require a lot of capital
Fortunately, today we have great access to the stock market and there are many cheap brokers out there, which charge only small or even any fees. And this is great, not only for people that do not have thousands of Euro available to invest in the markets.
In my blog post “How To Start Investing?” I mentioned, that it is important to choose a cost-efficient broker and that ETF’s are a good starting point for your first investments. There are a lot of options to invest in ETF’s based on a monthly savings plan at no charge at all. Thus, you can even start to invest €25, €50 or €100 monthly.
But you might think that investing such small amount of money is not sufficient to grow your net worth over time. Let’s take a look at an example and assume that you invest €100 per month over a period of 30 years at a fairly low annual average rate of return of only 5%.
- Monthly investment: €100 (€1,200 annually)
- Annual average rate of return: 5%
- Investment period: 30 years
- Total deposits: €36,000
- Portfolio value after 30 years: €81,537.59
- Portfolio yield: 126%
Of course, you need to consider paying taxes on your profits in the end, but even if you have to pay 30% taxes, you will still have almost doubled your money. I hope this example helps to understand the power of compounding interests and that even investing small amounts of money over a long period of time can lead to high returns. Time is a major factor especially if you are young.
On the other hand side, if you would like to invest in precious metals instead, silver is a cheap investment currently, with a price of approx. €22 per ounce at the time of writing (approx. €25 incl. premium, if you would like to buy physical silver at a dealer). Thus, it is not a problem for anyone to invest in silver occasionally. But how can you save more money and increase your monthly investment rate, to further accelerate your portfolio growth?
1. Earn more money
Obviously, the easiest way to invest more money is to earn more money from your regular day job. But this is easier said than done. There is no guarantee that your salary increases if you further educate yourself and improve your job performance. Many other factors influence that, e.g. the economic boundary conditions and the overall profitability of your employer. You might also not want to apply for another job, because you are happy with your current employer and job situation – fair enough.
I rather recommend you to think outside of the box. What are your hobbies and talents, what is your passion? Maybe you can start a small business based on that, selling some goods or a service as a side business, or work as a freelancer to support other businesses. In addition, there might be a business in your area that you can support once in a while, to earn a little extra cash.
The good thing about this approach is that you will start to generate an extra income stream, that is independent from your regular day job. In addition, you will get in touch with more people, which might establish further opportunities in the future.
2. Avoid bad consumer debts
Avoid bad consumer debts. The interest rates that you will pay for these debts are insanely high and you will have to pay the money back anyways. I am not talking about a mortgage to buy a new house, but more in particular about credit card debt or an overdrawn bank account. If you cannot buy something out of your pocket, do not buy it – that is it.
3. Reduce your fixed costs
Reduce your monthly fixed costs, e.g. rent, telephone bill, costs for internet service, energy costs, costs for insurances etc. Ask yourself if you can move into a smaller, cheaper, or shared apartment, or if you can share your apartment with someone else. Sharing rent will save you a lot of money. Moreover, take a look at your expenses regularly and check if you can change your service provider to get a better deal, or even a bonus to reduce your fixed expenses.
4. Cut your daily living expenses
Underestimated factors for possible savings are daily living expenses. I think we spend a lot more money on groceries, to eat out, on drinks or on tobacco than we might know. Take your time to analyze on what you spend your money on and cut unnecessary expenses. I mean, do you really have to go to Starbucks to pay for an overpriced coffee and avocado toast every day? Do you have to go to lunch every day when you are in the office? Preparing your meals at home will save you a lot of money and in addition your meals will be more tasty and healthier. I am not saying not to go out to have a drink or dinner at a nice restaurant regularly, but to do it more consciously.
5. Terminate unnecessary subscriptions
Do you have more than one subscription to streaming, music or entertainment services like Netflix, Spotify, Disney+ or Amazon Prime? Do you really need all of them and shouldn’t you spend less time watching movies and more time on your side business or to educate yourself? Maybe you can terminate unnecessary subscriptions and only use one in the future. Some credit card companies also offer perks for such services. Thus, this could also be an option to reduce your monthly costs for that.
6. Spend less money on lifestyle products
I know, it feels great to buy new tech products, like smartphones, smart watches, or a new TV. But is it necessary to always buy the latest iPhone or iPad, just because of minor technical improvements or new features? If you really need it, go for it, but I am sure that most of us will be happy using our phones more than one or two years. It will also be beneficial for our environment.
7. Sell stuff you do not need anymore
Sell stuff that you do not need anymore and that you do not use regularly. Obviously, if you do not use it, you do not really need it. Especially electronic devices lose value quite quickly due to their fast innovation cycles. I recommend you to take a close look on your ownings every 6 months and to sell old and unused stuff regularly.
8. Apply the 10% rule when buying a new car
The 10% rule implies to only spend 10% of your annual net income on a car purchase. Thus, if you earn e.g. €50,000 per year your car should not cost more than €5,000 according to that. By following this rule you will not be forced to buy your car on credit and in addition your overall annual expenses for your car (e.g. insurances, car service etc.) will be lower compared to a more expensive car. If you by a new car its value will be depreciated the most in the first years anyways, so why not just buy a used one instead?
I know, it is very difficult to follow that rule and I think most of the people do not follow it (me either), but in general taking a close look on the total costs of ownership before you buy a car will help you to make the right decision. Moreover, there is always the possibility to earn money with your car, e.g. by renting it out to outer people once or twice a month or as an Uber driver.
9. Avoid lifestyle inflation
In case you are able to increase your yearly salary, e.g. from your day job or even from other income sources, do not immediately inflate your lifestyle expenses, by buying a new car, moving to a bigger flat or spending more money on going out. Ask yourself if additional expenses are really necessary and rather define a fixed rate, that you will additionally use to save or invest in case your income increases. There is nothing wrong in enjoying life and spending more money, but always consider also to increase your savings / investing rate in this case.
When the pandemic hit us during March this year, I was forced to attend short-time work from my employer. Although the German government partly compensated my loss of income, I ended up earning less money and had more time to think about my financial situation. Thus, me and my family basically took a close look on all expenses that we had, and we reduced our fixed costs and daily living expenses. By doing so, we were able to fully compensate my loss of income and thus kept up with our savings and investment strategy. Looking back, it was a lot easier to reduce our expenses, than I expected in the beginning. Thus, I would like to motivate you to do the same, to be able to spend less money and invest more.