For some people investing with 5000 euros seems a lot of money. Actually it is a lot of money. However, it is also an amount within reach, which you can accumulate in several ways. A bonus at work or an inheritance might do the job for some. But if you’re not so lucky you might consider working two shifts. For those who already have the money in a savings account, you better start investing with it. Because the sooner you invest your money, the more wealth you can accumulate.
Although money don’t grow on trees and chances are slim money will drop out of the sky, 5000 euro is an amount which everyone can save rather easily. If you save merely 250 euro per month, you already achieve this goal in two years time. As soon as you have gathered this amount you can start investing.
Have an emergency fund
A lot of people are afraid to start investing. They hear wild stories of new investors who lost all their money and were left empty handed. What they don’t realise, is that these so called investors maybe, just maybe, started off the wrong way.
Whether your goal is to provide for an extra pension, or buying real estate, you need to make sure you first have a financial buffer. This buffer can be used in times of need: you loose your job, your car breaks down and you instantly need money.
A healthy financial buffer is 3 to 9 times your monthly net income. If you’re single a 3 month emergency fund is probably enough. When you have a family and kids to feed, probably it’s safer to let your fund grow to 6 to 9 months of take-home pay.
Goals are everything
Its much more relaxing to start investing when having an emergency fund. Before you start off investing, make sure you state some clear goals. Whomever with a specific goal and timing to achieve that goal to accumulate real wealth has a different mindset towards investing.
Parents who want to buy an appartement or house for their children at college or university, want to make sure they can access their money when time comes. Someone who doesn’t have a specific item in mind to buy, has more possibilities and can hold onto his investments longer.
The sooner the better
Investing for the long term has a lot of advantages. When you find yourself in a downwards or bear market, you might be able to sweat it out instead of having to sell at a bad moment. Youngsters who start investing now, have time on their side even when they take high risks. When you are 60 trying to build an extra savings for when you retire, you are not in the same position for risk taking and therefore the gains will probably also be lesser. Doing a risk analysis is always a good idea.
Read more: 8 Books Every Beginning Investor Should Read
Let your money work for you, instead of working for money
That’s the key to success. Building wealth should not be that hard, you only need some perseverance. When you start investing with 5000 euros and receive your first interests or dividends, you should consider investing them as soon as possible. That’s how you can gain from compounding. After a couple of years you might even get more return from you interest than from your initial capital, through compound interest. Something Warren Buffett mastered effectively.
Start investing with 5000 euros: the math
Lets assume an average interest of 5% (which is far below the 6,6% average return of European stocks in the past 20 years). Besides your starting capital of 5000 euro, you also invest another 250 euros per month. After 30 years of investing, you actually have a total of 225.000 euro of an investment of 95.000 euros. After 13 years you even receive more interests than the capital you’ve invested so far.
If you are a good investor which receives an average return of 10%, you already reach the point of more interest than invested capital after merely 6 years. After 30 years, you are already worth 600.000 euros. Warren Buffett was able to average his rate of return at 20,8% (!) over a period of more than 50 years. That’s 12,7 million euros for every 1.000 euros invested.