The quick answer to the question asked by the title is as follows: learn how to invest.
Before closing this page and commenting: “but I don’t have much money to start with…”, keep reading.
Investing on your own takes time, discipline, and some capital to start with, and to be honest, it is not for everybody. But it’s very important to learn about it for a number of reasons.
Reason #1: not knowing costs more money
You might not know that the teller, the financial advisor, the broker, and layers and layers of people in financial institutions might have a serious conflict of interest with you that cost you money.
Let me start with a story.
In 2013, I didn’t want my money to just sit in my savings account, so I went to a bank and spoke to a financial advisor. I absolutely adored that lady and her beautiful spotless office. She was always smiling at me and was well-spoken and patient. I asked if she could open a self-directed investment account for me, and she said I wasn’t eligible because I wasn’t a Canadian citizen.
I then followed her advice and put my money in a GIC (Guaranteed Investment Certificate). I was told that I could make 1.5% per year with it. “Sure, it’s low, but it's better than nothing”, she said.
Fast forward two years, I learned that she was wrong. One doesn’t have to be a Canadian citizen to open a self-directed investment account in Canada…
I also learned something else: a major part of financial advisors’ income comes from the commission of selling financial products.
I started to feel cold on my back. As she lying to me when she said I wasn’t eligible for a self-directed investment account, so she could collect commission off my GIC? Those warm smiles, great conversation, …. Oh no.
Yes, it was a sales job for her.
How did I lose money from not knowing anything about investment?
She did not tell me that my GIC was non-redeemable. So when I needed some money six months later I was told, “sorry, you need to wait for 18 months more until your GIC matures.”
The worst part was that 2013 was a big bull year for the stock market, and it was also much cheaper to exchange US dollars for investing in American stocks compared to now, but my savings was locked in a GIC because I was told that’s the only choice I had. The opportunity cost and time cost was heavy for this one.
This article is not about how “bad” these people are; the financial institutions set up this profit model which pressures them to meet the sales. If you visit the same branch often, you may notice that the turnover rate for financial advisors is fairly high. There are also financial advisors out there that treat their clients with great care, but it is usually under a different model, where the advisor is not incentivized to sell but rather to advise.
Unfortunately, I had to work with a few more financial advisors in order to open some accounts in the past few years, and it was the same setup over and over again across different banks. A warm smile, well-decorated office, make you feel well taken care of, and throw out the line “this fund really meets your situation”.
Am I alone in this situation? Heck no. According to Bloomberg, it was estimated that Americans lose $17 billion a year to conflicts of interest among financial advisors.
It can be very costly over our lifetimes being in a disadvantaged position when working with financial institutions.
So learn investing.
Reason #2: Don’t underestimate yourself
The speed of your wealth accumulation might be faster than you anticipate. Start learning about investing now and use the knowledge right away when your next paycheck comes.
Many financial institutions will allow you to start investing with as little as $500. Starting by playing with a practice investment account is also a great option, and they are offered by a number of financial institutions free of charge for their clients.
Reason #3: Passive income is sweet
“I have so little to invest. What’s the point of getting ten bucks a month for all those efforts?” My friend said.
“But that $10 was made when you are sleeping, eating, and talking to me,” I said.
Setting everything up might take some effort, but once the money is invested (properly), you are no longer working for that money. It is working for you. Investing is one of the ways to generate passive income. This blog may help you learn more about passive income.