How to Understand Investing in 4 Minutes

My current life motto is: work less, live more. But, with prices ever on the rise, sometimes this can feel like a pipe dream.

So... how do you do it? Enter: investing.

WHAT IS INVESTING?

My favorite definition comes from Robert Kiyosaki, author of Rich Dad, Poor Dad - and, most importantly, keeps things simple:

All investing is, is learning the difference between an asset and a liability - and buying assets.

ASSETS VS. LIABILITIES

As Kiyosaki says, "You must learn the difference between an asset and a liability—and buy assets. It's so simple a rule that it's almost anti-climactic. But, if you want to be rich, this is all you need to know. It's rule number one. It's the only rule."

So what is an asset? An asset is something that puts money into your pocket.

And a liability? A liability is something that takes money out of your pocket.

HERE'S A SIMPLE EXAMPLE

Here's a tale of two people - let's call them Jack & Jill - who want to eat an egg.

Jack goes to the store, hands over some money, and buys an egg. He eats the egg. The end.

Jill goes to the store, hands over some money, and buys a chicken. That chicken lays two eggs per day. Every morning, Jill eats one of the eggs, and sells the other.

Do you see how Jack purchased a liability because money was taken out of his pocket? And do you see how Jill purchased an asset because, after a bit of time, money will ultimately be added to her pocket?

This is typically how it goes with investing. You buy an asset. You wait. Eventually your asset will put more money into your pocket than you originally paid for the asset in the first place, ultimately making you money.

5 TYPES OF ASSETS

There are easier ways to invest than buying a chicken 😉

Here are 5 types of assets you can try, ordered from easiest to hardest in terms of level of difficulty to getting started (in my opinion!).

PAPER ASSETS

Think: the stock market where you can buy 'shares' of companies (in other words, you buy a piece of those companies, becoming a part owner).

So, if the value of the company goes up, so does the value of your share(s).

There's typically a low cost of entry, and these assets are the easiest to get into and out of.

COMMODITIES

Think: physical goods like precious metals (gold, silver) and food (grain, coffee).

You can invest in commodities by purchasing the physical goods themselves (like buying gold coins/jewelry, or coffee) to resell later for more than what you paid, or investing in commodity-related companies in the stock market.

This is a bit harder to get into than paper assets because, if you're buying physical goods, it requires you to physically get them, store them, and when it's time to sell, list them for sale and ship or deliver them to the buyer.

BUSINESS

Think: starting your own gig!

It's not as scary as it sounds and, depending on the business type, you may not need much (or any) money to start.

Remember, it doesn't necessarily have to be a full-time thing if you don't want it to be; you can keep your primary job and run your small business on the side.

It's a bit harder to get started in because it takes more thought, time, and strategizing, but a business is indeed an asset because the goal (in addition to doing something you love) is to put money into your pocket.

REAL ESTATE

Think: buy a house, a second house, a duplex, etc.

Higher cost of entry, but if you can afford it, real estate can be great for:

Cash flow (if you rent out the property for more than your mortgage payment, you'll have additional cash each month), and
Capital gains (one-time lump sum profit when you sell. BONUS: at the time of writing this, if you live in the house for 2 of the last 5 years, you don't have to pay capital gains tax [this is true for US residents, not familiar with laws in other countries])

CRYPTOCURRENCY

Think: Bitcoin, Ethereum, and others.

I'm a believer in crypto. I believe it's the future, and there is potential for big growth, but be prepared; the learning curve is steep, it's volatile, and if you don't prioritize security, there's a high risk for theft.

You don't need much money to start since you can buy fractions of crypto. For example, you don't have to buy 1 Bitcoin, you can buy 1/10th of a Bitcoin... or 1/100th of it... or literally however little you want.

As always and with any investment: never invest any money you're not willing to lose.

(Don't let this scare you away... if you never invest, you'll lose out on multiple 6-figures, if not 7-figures, over your lifetime. Seriously. Just make sure you have an Emergency Fund... keep reading for more information on this.)

BEFORE YOU START

Before investing in anything, I suggest having your Emergency Fund completely funded.

My definition of an Emergency Fund is 6 months of living expenses, stored somewhere safe.

(If you don't know your monthly living expenses, check out my Free Monthly Budget Calculator which will tell you exactly that.)

As long as I have my Emergency Fund, I don't worry much about what's happening with my investments because they could plummet to literally $0 and I'd have 6 months to figure out what to do next to make more money - which, for me, feels like plenty of time.

If you feel like you'd need a bit longer, then make it 9 months. If you don't feel like you'd need that much time, make it 3 months. Modify as needed until it feels right for you.

But just make sure you've got one - an Emergency Fund, that is.

And make sure it's somewhere with relatively low volatility, but with as high a yield as you can get (consider looking into a HYSA, which stands for "High Yield Savings Account").

Again, if you don't know your monthly living expenses, check out my Free Monthly Budget Calculator which will tell you exactly that.

And then all that's left to do is begin!

Don't be afraid of investing... be afraid of NOT investing.

Remember: all you have to do is know the difference between assets and liabilities - and buy assets.

You've got this 🎉