Have you ever wondered why the rich just keep getting richer? Perhaps the most significant weapon in their arsenal of wealth accumulation is investing. For people who are focusing on their future, planning for retirement or simply trying to build wealth, investing is the ultimate means for getting your money to work for you. And while investing sounds great, getting involved can be another matter. Just as lawyers use a great deal of jargon to trip you up, shady brokers may use the “talk of the trade” to confuse new investors into bad deals. Not for much longer! Today you are going to take a look at the complicated world of investing and begin to understand money management for yourself. Included here are basic investment principles to help you navigate your financial future on your own.
Let’s get down to basics straight out the gate today. Investing is defined as the act of committing money or capital to an endeavor with the hope of receiving additional income or profit. Basically, investing is the act of making your money go out and work for you. Originally, you may have believed the only way to grow wealth was by going out and working for it. With investing, you can earn a little and then send it out to grow.
Have you heard of “passive income?” Passive income is simply money earned while you are out doing other things. Investing your money can allow your bank account to grow, even while you are taking a nap, reading a book or out on vacation. For many people, passive income is the dream and goal, and investing gets you one step closer to financial self-sufficiency.
Investing is not a fancy method of gambling. True investing involves a great deal of research and informed decision making regarding where to put your money and how to make it grow. You are not simply handing money to someone and hoping they pay it back with interest. Good investments involve a near guarantee on returns.
Reasons to Invest
Do you have a desire to retire at some point? With decreased pensions across the board, many workers are finding that there is a lack of funding towards their retirement years. Thus, the only way they can guarantee a secure financial future may be through investing. By planning ahead, you can be sure there will be personal wealth to utilize in your golden years, enabling you to take that exotic vacation instead of just visiting your kids.
The act of compounding was heralded as one of the “greatest mathematical discoveries of all time,” according to Einstein. Compounding allows your money to grow in leaps and bounds on a yearly basis. Let’s take a look at how it works.
Let’s say, you initially invest $10,000 with a 6% interest rate. After one year, your money will have grown to $10,600. Now, instead of withdrawing your $600 in profits, you leave it in the account. You will now be earning interest at 6% on 10,600, giving you the next annual total of $11,236. The reinvestment of the $600 allows you to earn an additional $636 the next year.
While an extra $36 may not seem like much, let’s take a look at how you earned it. Did you have to work? That $36 was earned purely out of interest by letting your money sit, and, better yet, that $36 can now earn interest on itself as well. It is easy to see how within a few years your money could be doing a great deal of work for you!
The true benefits of compounding interest are demonstrated when you invest at a young age and allow the money to mature. Avoiding the temptation of withdrawing any of the principal or interest will allow your money to grow at a steeper rate every year. Imagine a $15,000 investment when you are 25 growing into nearly $100,000 by the time you reach 60!
Measure Your Horizon
The amount of money you can afford to invest, and where, is highly dependent on how old you are and your specific needs. For example, an older person who is living off of the interest from their investments is highly dependent upon wealth preservation and maintenance. However, a young investor whose investment is not putting food on the table can afford to get involved with a little more risk and potential payouts.
In addition to age, the amount of wealth to your name will affect how much you can feasibly invest. While a billionaire could drop $100,000 on a new company with an uncertain future, a younger couple with a baby on the way cannot afford to invest their $10,000 in an unproven risk. Where you choose to invest is dependent on your age, wealth and basic needs.
While this is not a fully comprehensive look into investing, this should have given you an idea of some of the benefits and reasons to begin. Starting out with a discount broker could allow you to begin investing even if you do not have a fully comprehensive understanding.