Who is the fastest self-made billionaire ever? While it took Warren buffet 55 years to join the billionaires club, Jay Walker literally did it in less than a year. He launched Priceline.com during the dotcom bubble and his net worth instantly jumped from zero to billions.
But that wasn’t sustainable because when the bubble burst, his net worth crashed as well. Warren Buffet is still at the top of the list and he doesn’t seem like he would be going anywhere anytime soon. That’s the kind of wealth you want to build.
The game of money isn’t easy. It’s tough, competitive and ruthless and If you don’t know the rules, you are doomed to fail. The problem with most people is that they might work hard their entire lives but end poor at the end of their journey because they don’t know how to let their money work for them to make more money.
In other words, they don’t know how to invest. Let’s assume that you have been saving money and have an extra $1000 in your bank account. That is already an achievement because nearly 70% of Americans don’t even have an extra $1000. Instead of spending it on another useless gadget or a pair of shoes that you will wear once and keep in your wardrobe for many years before you finally throw it away, let’s assume that you are going to invest that money.
But the question is,
How do you invest your first $1000?
Do you invest it in real estate or the stock market? What kind of stocks do you buy is $1000 enough to start investing?
To understand what investing is and how it works, consider this example, You worked so hard and saved $300,000, you can pay a visit to a Ferrari store and get yourself a luxurious car and let everyone know how successful you are or you can buy real estate (house) and rent it out.
Every month you will receive at least $2000. If you decide that you no longer want to receive the $2000 paycheck every month, you can sell it and get back your initial investment. In fact, the value of your investment might even appreciate, so you will sell it for a higher price and that’s how money makes money.
But you can’t buy a real estate for a $1000. That’s not even enough for a down-payment, however that doesn’t mean you can’t invest that money elsewhere and let it grow. The easiest way is just to deposit it into a savings account and generate interest.
Why would the bank pay you for keeping your money in the bank?
The bank is going to take your money and loan it to someone else at a higher rate and would share with you a portion of that profit, that’s how banks work in summary. The only problem with this strategy is that interest on the deposits account is so low that it isn’t worth it.
The highest rate you probably can get is 0.8% which means that if you invest that $1000 into a savings account, 12 months from now, you will receive an extra $8, which is extremely low because the Fed targets an inflation rate of 2 to 3%.
This means, if you are not getting at least 2 or 3% overtime, the real value of your $1000 will depreciate. You can buy with it less good every year but,
Why are interest rates so low on deposit accounts?
Because interest rates in general, are low this year since the pandemic forced the Fed to lower them (interest rates) to encourage everyone to borrow money and spend. A year or two from now, once we get out of this recession, the fed will increase interest rates to 1,2 or even 3%, meaning interest rates on the savings account will rise as well.
Your second option is to buy government bonds. A government bond is a security that is issued by the government to raise money to support government spending. For example, if the government wants to build a school but it doesn’t have the funds to do that, so it issue an IOU, a piece of paper that says that whoever owns this security is owed this much amount of money plus interest by the U.S government.
Of course this is an over simplified example, but that is the point in short government bonds are heavily influenced by interest rates, so since interest rates are extremely low this year, bond rates are less than 1% but two years ago when interest rates were high, the rates were as high as 3%, which is not bad since these bonds are the safest investments you can make.
Any investment carries with it a certain level of risk, if you are loaning money to the U.S government,
What are the chances that they will default on their loan?
For the U.S government to go bankrupt, the entire U.S economy might have to fail. That’s why U.S bonds are considered the safest investments in the world. If you want to make a higher return, let’s say 10 or 30%, then you have to consider investing in the stock market.
For example, Amazon’s stock price increased by over 80% just this year. Google’s stock price rose by almost 30%. Tesla’s stock increased by 721% (yes, you heard that right). Then the question is why anyone would invest elsewhere when you can double or even triple your money in the stock market. The answer is RISK.
When it comes to government bonds, for instance, there isn’t much risk. In fact, it is risk-free to a certain extent. Although when it comes to individual companies, there is a rick that the company might fail. It might report negative earnings, pretty much any negative news can drive the stock price down.
The company might release a product and of the public doesn’t like it that can make some negative headlines which can drive the price down, so with higher returns comes more risk. Apple is a well-established company and its chances to fail are way lower than Tesla for instance, but it also has less room to grow than Tesla, that’s why Tesla grew by 721% in 2021 and Apple by just 70%.
What you have to determine for yourself is how much risk you can take without going nuts. If that $1000 is all that you have left, maybe risking it all isn’t the wisest option because if things turn south, you can end up losing most of it.
So one way investors minimize their risk in the stock market is by investing in an index. The most famous one is the SP500, which tracks top 500 US companies, so an index fund would basically invest in these top 500 companies. Some of these companies will definitely fail, but others will grow.
Judging by historical data, the average return rate for the SP500 since the 1920s was around 10%. This means buying a share of these index funds means you are buying a tiny share in the top 500 U.S companies.
My three top favorite index funds are
- VOO or Vanguard 500 Index Fund,
- QQQ;an Index fund by Invesco and
- FZROX, a Fidelity Zero Total Market Index Fund.
All of them are great and invest pretty much the exact same companies.
How Do You Buy Shares In These Index Funds?
First, you need to find a broker, someone who is qualified to sell you stocks. In the past it was always someone; you had to call him and ask him to sell you some shares.
Remember the Wolf of Wall Street? He would spend his entire day calling people and try to sell them worthless stocks. Thank God we are in 2021 and things are much better and easier.
Brokerage firms created apps so that you can buy shares from the comfort of your smartphone such as Robinhood, Webull and so on. All you have to do is to download one of these apps and sign up and you can start investing right away.