When I was starting out on my journey earning money online, I became fascinated by Financial Independence and the FIRE (Financial Independence Retire Early) community in general. I loved the idea of saving now to live better later. Investing is a huge part of being Financially Independent so in this post, I will answer the question What is online investing?
My interest in FIRE was sparked by the infamous Mr Money Mustache. For those of you who don’t know Mr Money Mustache is a Canadian born blogger who retired at 30 years old.
He was able to do this by living off just a small amount of his earnings from his full-time job and he invested the rest online.
Once he had acculumated a certain amount in his online investment accounts he was able to retire and live off the interest he gains from it.
I’m not a natural when it comes to numbers. Math is not my strong point and so I always stayed away from investing since I didn’t quite understand what it was all about. I’ve now started to invest since I have extra money to spare.
What is Investing?
The best place to start is at the beginning so we are going to get really into the basics. Investing is simply taking some of your money and trying to increase the amount you have by buying things that you think will increase in value.
Most people think of investing as stocks and shares and whilst that’s correct, they are only really a part of it. People also invest in property, gold, mutual fund and bonds.
I am going to be looking at stocks and shares investing in this article, but its good to know that there are lots of different things people can invest in, with the hope of doubling their money.
Investing is a gamble and definitely not risk free and whilst the hope is that you get a nice little profit there is also a chance you can lose everything you put in.
Calm head and minds are definitely needed when it comes investing online in the stocks and shares market. Any images of people shouting buy and sell and running around frantically are best left for Hollywood films!
Why should you invest?
As a beginner this is usually the first question in my mind, Why bother investing at all if it isn’t guaranteed and I could lose all the money I put in? The easy answer is to grow your wealth at a rate that is in line or higher than inflation.
Every year the cost of living rises, so a litre of fuel this year costs £1 will actually cost £1.02 next year at a 2% inflation rate. Whilst that doesn’t sound like a lot imagine for a moment that inflation is at 10% so the same fuel now costs £1.10. In 10 years time, if we had a steady 2% inflation rate the cost of fuel will be £1.22 if we had the 10% rate the cost will be £2.59. So the rate of inflation matters when looking at your investment returns.
The sore point of inflation doesn’t just stop at your expenses, it also affects the cash in the bank. What you could buy with £100 savings today, you won’t be able to afford in 10 years time with that same £100. However, when you’re investing, you have the opportunity to earn a higher rate of interest than that of inflation. This means your money will increase at the same rate of inflation (so it’s always worth the same amount) or ideally higher which means you are making more money without having to actually do anything.
If your savings account interest rate was seriously high, then it would be smarter to leave your cash in there and not bother investing, but unfortunately the days of banks offering a higher interest rate than inflation are over so you effectively lose money when its in the bank.
Investing is a passive way of making some serious cash and if you’re clever and only live off what you need then your investments can sustain your cost of living.
Compounding is Key
Now we understand why we should invest online, next is understanding how it works. This where rate of return and compounding come in.
Each investment that you put your money in has a rate of return which simply means the rate at which your investment will increase in value over time.
Compound interest is quite simply earning interest on your interest.
Let’s use some real-life examples to understand this further. When I was looking at what to do with £10,000 I earned online, I had the option of putting it in a savings account that paid 2% interest or to invest it on the stock market that was growing at 8% a year.
If I chose the savings account at 2% then in one year I would have earned £200, bringing my total to £10,200. If I then left my interest amount and starting balance in the savings account for another year, at 2% interest again then I would end up with £204 interest, and my total balance would now be £10,404.
This is because my rate of return is 2% and I earned interest on the interest I invested which was £200 from the first year. I am now compounding, as I’m reinvesting the interest, it then earns interest. Each year I would continue to earn interest on my increasing saving balance.
Every year you would continue to earn interest on your growing account balance.
If I chose to invest in the stock market for example which is growing at 8% then my interest for year one would be £800. If I then left the interest in my investment along with my starting amount in for a second year I would have a closing balance of £11,664.
Breaking this down, my rate of return is 8% and by putting the interest I earn back into the investment I am earning interest on my interest (compounding). If I left the money in my investments and left the interest earned in the account then I earn more as I am compounding. My total balance, if I did this for 10 years, would be £21,589.25! This is assuming I never added any extra money to it after my starting £10,000.
Compounding is everything when it comes to investing your money online. The only difference between investing and putting your money in a savings account is that the rate of return is much higher in investing.
Online investing is definitely a good option to choose if you’re looking to earn money passively and have some money to spare each month or a lump sum. Keep reading this site to find tried and tested ways to earn money online!