Editor’s note: This article was first published in January 2019. Fixed-term deposits “not exceeding 1%” in Spain, low fixed-income returns in general, and parking spaces described as a good investment “today” reflect that time. Interest rates have changed considerably since.
However much we break the subject of investing into tiers, when someone asks me “what can I invest my money in?” and we’re talking about a small amount, my default answer is always: buy a couple of financial education books and a couple of investing books while you keep earning an income.
The first and most important investment we should make is an investment in knowledge. It’s the most profitable investment of all, and the one that will pay us the biggest dividends in the long run. Once we’ve done that, before rushing out to find places to invest our money, the first option, and this one should be compulsory for everyone, is…
1. An emergency fund
We should always have an emergency fund so that, if our circumstances take a turn for the worse or our main source of income fails, we have money that lets us survive and cover our basic expenses for at least six months. There are many reasons beyond the obvious one for having an emergency fund.
2. The first and best place to put your money
Paying off high-interest debt. Please don’t ignore this advice. If you have credit card debt or consumer loans at more than 6% interest, you shouldn’t be investing in anything. The first thing you must do is get rid of those debts, because obviously, if you pay off a 6% debt, it’s as if you’d earned a 6% return on your investment. It’s the most profitable, safest and most useful investment there is. And if it’s credit card debt, which can carry interest of up to 21%, paying it off will be the best investment you could possibly make.
And now, let’s move on to the investment options.
Where to invest your money
Fixed-income products
For investors who don’t want to take on much risk, the truth is that the outlook right now offers very little return. The options here would be:
1. Fixed-term deposits
While in their day we could find fixed-term deposits paying up to 4% a year, right now we’d find that returns in some countries, such as Spain, don’t even exceed 1%, so investing in deposits can make you lose purchasing power because of inflation.
2. Government debt
Treasury bills and bonds are still a good investment option. At the very least, they’re about as safe as it gets. In some cases it makes sense to look beyond your own borders and invest in other countries’ government debt in search of a higher return.
3. Savings accounts
The same thing has happened here as with fixed-term deposits (returns have fallen a lot), but there are still some savings accounts that can offer a decent return, at least for a while. When is opening a savings account a good option? Above all when we’re starting to save, mainly because it lets us automate our saving if we find we lack the willpower to save.
See also: How much should I save each month to stay on track?
4. Where not to invest, in my personal opinion
Before moving on to less conservative investments, let me take this opportunity to remind you that shortcuts to making money can turn out to be very expensive. Steer clear of quick formulas for making money on the stock market, such as trading. I’ve explained some truths about trading in a previous article. Don’t fall into the trap of getting rich with binary options or cryptocurrencies, and I’ll go further: be wary of any investment product with the word “Fund” in its name (except when we’re talking about index funds), “Guaranteed” and so on… we’ll explain this in more detail shortly.
Investing in equities
5. Investing in shares
Although many people are afraid of the stock market, there are certain strategies that can make investing in shares more or less safe, as long as we’re clear that we’re investing for the long term. And by long term I mean an investment horizon of at least 5 or 10 years.
When it comes to investing your money in shares, there are also different investment strategies:
Investing in indices
One profitable, lower-risk way to invest is to invest directly in the index. This means that instead of picking individual shares, we’re buying all the shares at once. The good thing about this kind of investment is that over a 10-year period, averaging through both the falls and the rises, investors have made money.
Here we explain in more depth how to invest in an index. As you’ll see, it’s done through low-cost ETFs and index funds.
The strategy of averaging down is known as the DCA strategy (explained here).
Investing in shares for dividends
Another way to make stock market investing resemble fixed income is to build a dividend investing strategy. For a higher return, and to refine it a little, we can add the DCA strategy, that is, averaging down, to our dividend investing strategy.
I’ve written at length about how to invest in dividend shares and which companies pay the best dividends.
What else can we invest our money in?
There’s still a wide range of options for investing your money. Now that we’ve covered fixed income and equities in detail, we can’t leave out the following investment options.
6. Investing in real estate
When we talk about investing in real estate, we don’t mean buying a house and paying the mortgage, thinking that in 30 years the house will be ours. That option is valid only if it’s the home we’re going to live in. When we talk about investing in property, it’s a different matter, and there are several ways to invest:
Homes as an investment
Buying a house, a flat or a group of flats, or even a whole building, in order to rent it out. Clearly this kind of investment requires initial capital or a large bank loan, so you need to do a thorough market study. However, there are many ways to go about it. In this article I explained the 8 ways to invest in real estate. In fact, it explains how to invest in property even without owning any property. That means doing it through REITs, which are companies that invest in real estate assets.
You can also invest in commercial premises and in land, as long as you can increase the land’s value or have the chance to buy a large plot that you can sell off in pieces. With land, dividing it up brings in more money.
7. Investing in parking spaces
This one deserves a section of its own. Rising prices for parking spaces, driven by strong demand because of how hard it is to park in the centre of big cities, have turned both car parks and individual parking spaces into a very profitable business opportunity. Obviously you’ll have to run the numbers carefully before going ahead with buying a parking space to rent out, but within real estate it’s currently a good investment option worth looking into.
8. Investing in gold
Gold tends to act as a safe haven in times of crisis, but be careful: the value of gold fluctuates too. It’s true, though, that it works well as a complement to our investment portfolio, because when markets become unstable the price of gold usually rises.
There are many ways to invest in gold, and it doesn’t have to be physical gold. We can invest our money in gold by buying financial products such as ETFs, which let us be invested in gold without owning physical gold. See: 6 ways to invest in gold
The good thing about gold, both physical and through an ETF, is that you can sell it at any time, anywhere in the world. It’s undoubtedly a liquid asset.
See also: The difference between liquid and non-liquid assets
9. Investing in startups
Here we’re getting into risky investments. There are plenty of platforms that let you invest in startups. The downside is that it’s not like investing in the stock market. All these companies are born with the idea of becoming the next Facebook, but unfortunately 9 out of 10 end up failing and investors lose money on them.
That’s why investors with the most experience in this kind of investment advise diversifying across startups: if you invest in 10 companies and only one succeeds, it’s quite likely that the return from that successful investment will outweigh the losses on the other nine. Personally, I don’t recommend investing recklessly in this way. That said, if you really believe in one of the projects being presented, it can be a good idea, not only to make money but also to take part in a newly created company.
Investments here can range from €1,000 to unlimited amounts. One of the best-known platforms for investing in startups is The Crowd Angel.
See also: Steps to get started and become an investor
10. Investing through crowdfunding
Much like the previous option, we can invest our money through crowdfunding platforms, where an entrepreneur raises capital to launch a business idea or a product. It’s a matter of looking at what each entrepreneur is offering.
Well-known crowdfunding platforms
- Lánzame
- CrowdThinking
- Here are 7 crowdfunding platforms
11. Investing in micro-loans (crowdlending)
This type of investment is winning more and more followers. Crowdlending is about people lending money to each other. As a rule the amounts are small and the return isn’t especially high, but it has become a way to earn interest on your money without taking too much risk. We’re talking about being able to lend €100 each to 10 different people.
Just in case, with micro-loans we should spread our investment in case someone fails to pay us back. These are the best crowdlending platforms.
12. Investing in works of art or collectibles
Buying works by emerging artists can be a very profitable investment, but personally I wouldn’t invest in art, mainly because I can’t tell a Picasso from a painting by a three-year-old. Still, whether you have knowledge of this field or you know you can get good advice, art is an investment that tends to deliver good returns over the long term. It’s another way to invest in a safe-haven asset, but be careful: I’m not sure to what extent works of art are liquid assets.
13. Investing in assets that generate passive income
This is where it gets interesting, because there are many ways to create assets. An asset can be an investment in shares that pay you dividends. An investment in property is also an asset.
But there are other kinds of assets too, such as websites, or writing a book or creating a course and distributing it through the various platforms.
Patents are also an asset that generates passive income. If you buy a patent, or patent a product of your own and it succeeds, you can live off the returns, depending on how successful it is.
Acquiring the rights to any work and collecting royalties is also an asset.
Likewise, if you like photography, you can create an asset with your own brand by uploading your photos to stock image sites, where every time someone downloads a photo you’ll receive a percentage of the profits.
14. Investing in your own business
This would certainly be my favourite investment, because there’s no better investment than one in your own business. There are plenty of business options available today, both physical businesses and internet businesses.
See also: 8 strange ways to make extra money without effort
Featured image: Evan Bench, CC BY 2.0, via Flickr.
