Are you trying to get ahead financially through saving and frugality? It’s a great way to do it, but not the only one. Other option to enhance your financial life is increasing your income.

There are countless ways to achieve that. The most obvious one is by earning more. You can get a pay rise or take on another part time job, if a pay rise is not achievable in your current position.

However, the option we are going to explore today is investing. Instead of selling your time and labour, you can let your money do the work for you. Your job with investing is to place your money into an investment type that suits your needs.

Investing is not for everyone

Before describing particular investment types, let’s find out if investing is the right option for you. The most important rule here is to see if you have any extra cash to spare. It means cash which won’t be missed for your everyday expenses.

Let me explain. If you live from a pay cheque to pay cheque then you obviously can’t spare any extra cash. If this is your situation then I would advise you to wait until your income is higher than your expenses. The worst thing you can do is borrowing money for investments.

There are few investment strategies that use borrowed money for that purpose. However, if you are still a beginner then don’t do it. It’s too risky and can put you in a dare financial position.

Before moving to the investment world, try to restructure your finances first. Use budgeting, savings and extra earnings to generate spare cash. I am talking about these strategies in other articles on this website.

Your Investment Options

The main factor to describe different types of investments is risk. The risk means a probability that you will lose some or all of your invested money. Possible income or profit from your investment is directly proportional to the risk you take.

Simply put – the higher the risk the higher potential profit. That’s how things should work. You may come across some investment options that disobey this rule. If you do, then run away from such investment. Why would anybody take more risk for something that brings in less profit?

In most cases the risk versus returns principle holds.

So, let’s see what are your investment options based on risk:

1. Saving Accounts and Term Deposits

It’s the safest but often least profitable option. If you hate losing any money and prefer security over eventual profits then this option is right for you. You can expect annual returns somewhere between 3-4%.

Term deposits usually offer slightly higher returns, but you have to commit the money for longer terms. Some Term Deposits won’t let you withdraw money prematurely. Or if they do then you will lose almost all accrued interest. In some cases they may even charge cancellation fees which will eat some part of the principal as well.

Similarly as Savings Accounts, Term Deposits carry minimal risks.

2. Government or Bank Bonds

It’s considered slightly more risky than bank deposits, but only marginally. It can offer you slightly higher returns. But don’t expect anything extraordinary.

You will get maybe 0.5 to 1% more than what you get with saving accounts. The downside is that usually there is a minimum investment amount. You need at least $5,000, sometimes $10,000. If you have more extra cash and hate the risk, this can be a right option for you.

3. Debentures

You have probably heard about it, but many people don’t quite understand what it is. Here is how it works: You hand over some cash to a finance company. They then use your and other people’s cash to invest it elsewhere in big chunks.

The profits (and losses, too) are shared among all investors. Plus some part of it is paid to owners and managers of the finance company.

What is the problem here?

The reputation of Finance companies in New Zealand has been tarnished recently. Many did wrong investment decisions or didn’t protect themselves against financial crisis that hit in 2008.

Many of you already know the results – dozens of these companies went down under. And investors’ money with it.

Debentures were once considered moderately risky. Sometimes were even promoted as “almost like a bank deposit”. Theoretically, if managed wisely, debentures are a moderate risk.

But in the current economic climate and with past experiences I would think extremely hard before handing my hard earned cash to this kind of finance companies.

4. Kiwisaver

I know, now you wonder why I placed Kiwisaver after Debentures.

Well, that’s because I personally consider Kiwisaver risky investment. Yes, more risky than Debentures. And if you read this website regularly then you know that I am not a big fun of Kiwisaver.

Here are my main reasons:

1. Kiwisaver basically locks your money until you are 65 years old. If you are in your twenties or thirties, that’s a very long time.
2. Kiwisaver charges high fees. They may not look too high now, but look what they will be once you accumulate substation amount in it. Brace for impact!
3. You have no control. Yes, you can choose a fund type (conservative/growth/etc.) and a provider but that’s it. You have no other say about how your money will be invested.
4. Too risky. They may say you otherwise, but I am old enough to remember how similar schemas in other countries have been plundered. If you want to know more do some investigation about Chile. Too far away? Try Australia. Still too far? Ok, then look at New Zealand in the 70-ties or 80-ties. Do you trust that Government or other forces won’t manage to put their itchy fingers on it over the next 40 years? Good luck!

I believe you have got an idea about Kiwisaver by now.

If you still crave that silly Kiwisaver $1,000 joining bonus then go ahead and join. But I don’t recommend it. If you are interested to learn more, check related articles at the end of this post.

5. Buying shares on stock exchange

First four investment options were kind of passive. You picked your preferred investment vehicle (how they are sometimes called), handed over the money and all else was taken care of.

Buying shares is more active. You never buy shares directly on the stock exchange. Only accredited brokers are permitted to trade there. What you can do is to find a broker who serves as an intermediary.

In the old times you had to physically visit a broker, sign a contract and then place orders via telephone. These days it’s all done much easier. Most banks offer this kind of service to their clients. Simply go to your internet banking, navigate to Online Share Trading, fill out online application form and that’s it.

How share trading works

Your application is usually approved within a day. You will be given a separate access to Online Share Trading area. It’s very similar to your internet banking, just instead of money transfers or bill payments you sell and buy shares.

But there is one little catch!

For each trade you pay a brokerage fee. That’s how banks and other online share trading providers are making money. Their fee is usually around $30 per transaction, no matter how much shares you buy.

Sometimes it may be $30 for volumes up to let’s say $10,000. If your trade is above that threshold, you may be paying percentage of the trade amount.

If you want to make a profit then the difference between your selling price and buying price should be greater than double the brokerage fee – one for buying and one for selling your shares. This is easier to achieve if you trade with larger mounts than just few hundreds of dollars.

Types of share trading

There are basically 3 types of strategies with shares investments:

• Buying shares for long term, hoping to increase their value
• Buying shares for long terms earning dividend income
• Buying and selling (trading) shares for short periods of time, hoping to make money on price differential (difference between buy and sell price due to market movements)

I am not going too much into details for each of these strategies. I will cover it later in separate articles. Generally, investing in shares is considered more risky.

You can lose some and sometimes even all of your money. There are strategies to minimise losses, for example through diversification. I will cover that later as well.

6. Trading currencies or commodities

The last type of earning money through investment is trading. Sometimes it may not even be called investing because it’s more like a game. Trading is the most risky but also most rewarding in terms of profits.

In principle trading is like a lottery. If done completely randomly, you have 50% chance of winning and 50% loosing. Well, in lottery your chances of winning are way smaller, so trading seems like a better option.

However, trading can be done better than just by random. Most people believe that they have knowledge which makes the random game more predictable, hence higher chance than just 50% to be a winner.

You can trade with almost anything quoted as commodity. Be it a gold, silver, crude oil, beef meat, butter, currencies, wheat, soy beans, natural rubber, etc.

Beating the 50/50 probability and winning the game

So, how can you make money trading and beat the markets? To do so you need some knowledge. What that can be? Basically, anything.

Markets move up and down based on hundreds of factors – GDP forecasts, inflation, central banks interest rates, employment statistics, weather, politics, regional conflicts and so on. You name it.

Traders usually believe that based on their knowledge and evaluation of these factors they can predict the market. If they succeed, they win. But equally they lose if they don’t.

Is trading the right option for you?

Well, the first rule mentioned in the beginning of this article is:  You should have spare money that you won’t need for everyday living.

The second rule for trading is: Treat it as a game, be prepared for both: wins and losses.

Be patient and don’t freak out every time you lose. Of course, there will be many wins and many losses. The point is getting more wins. Sometimes you’ll manage, sometimes not.

How can you trade online?

Banks usually don’t offer currency or commodity trading. However, there are many companies that specialise just on this type of business. You will need to create a trading account with one of them.

Similarly, as banks charge brokerage fee for each online share trade, you will pay brokerage fee for each online commodity or currency trade. You need to factor this fee into your calculations.

When selling something, you have to make sure that you cover both the buying and selling fee. You make a profit only if the difference between selling and buying price less two brokerage fees is a positive value.

Creating your own trading account with them is easy. Funds can be loaded to your account with any major type of credit card or your PayPal account. Once done, you can then start trading with currencies, gold, silver or crude oil. Their website also offers rich educational materials for further study.

If you have any questions, please feel free to drop me an email. You can also ask their helpdesk for any assistance you need.