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If you are still in your twenties and trying your best to be an adult, then you’re probably thinking, Why should I invest now? Well, to put it plainly, you should invest now in order to capitalize on the fact that money compounds over time. According to Investopedia, investing is how “the rich got their wealth and then kept it growing.”
If you haven’t been aware of this, it’s not entirely your fault. Investing is daunting and it sounds like a very “grown up” thing to do. It could even be another word that gets lost in the confusing noise of stocks, business, accounting and finance.
However, that doesn’t have to be the case. Investing isn’t a “get-rich-quick scheme,” but it is a way to mature financially and to exercise control over your own money.
By definition, investing is “expending money with the expectation of achieving a profit or material result.” To put it simply, investing is making your money work for you. It’s saving. Since we can’t realistically duplicate ourselves to make more money, investing is the next best thing. By putting some money into stocks, bonds and mutual funds, you open yourself up to making extra profit. And, to clarify some misconceptions, investing is not gambling. Although investing can be risky, real investors don’t throw money away. Investing requires thoughtfulness, analysis and reasonable expectations.
One of the most important things to know about investing is the time value of money. Basically, money today is worth more than money tomorrow because of the way money can earn interest. If you were asked, “Would you rather receive $10,000 today or $10,000 in three years?” your answer should be, “$10,000 today.” Not only is three years a long time to wait, but $10,000 today won’t be the same as $10,000 one, two or three years from now. If you were to invest the $10,000 today, that money increases because of the interest that gets added to it. Taking the $10,000 in three years wastes all that time you could have had to compound the interest on the investment. So, in this case, time is quite literally money.
Now that you know money today is worth more than money tomorrow, you also need to understand that interest compounds! Compounding interest is the real way that money is able to turn into a “powerful income-generating tool.” Say you decide to invest the $10,000 at 6%. In one year, you will have $10,600 ($10,000 x 1.06). If you keep the money you gained from interest ($600) where it is, then by the second year, you’ll have $11,236 ($10,600 x 1.06). If you allow your money to continue to compound in this way, by the third year of investment, you’ll have $11,910 – that’s almost $12,000 dollars.
If you had chosen to take the $10,000 in three years as opposed to today, you would have lost around $2,000. So, start early to allow your money ample time to compound. The more time you give your investments, the more opportunities you have to exponentially increase the value of your initial investment. For example, if you invest $15,000 as a one-time investment at the age of 25 with a yearly interest rate of 5%, you could have around $50,795 by the time you’re 50 ($15,000 x 1.05^25). If you started investing the same amount at 30 years old, however, you’d only have about $39,800 ($15,000 x 1.05^20). Think about it.
When it comes to taking control of your own money, it is very important to know your intentions, personality,and habits. Are you, for example, a big risk taker or are you more uncomfortable with risk? Do you prefer stability and calm environments? Are you preparing for retirement at a late age? Overall, knowing yourself will help you choose the right place to invest your money.
After understanding your preferences, try to pick the investment that best suits your needs and personality.
Bonds. Bonds fall under what is called a “fixed-income security.” Basically, a bond is any security that is founded on debt. When you, as an investor, purchase a bond, then that means you lend money to a company or the government. In return, the borrower agrees to pay you back with interest on the amount you lent them. More people are attracted to this type of investment because they are relatively safe. If you, for example, buy bonds from a stable government, then you’ll have a steady stream of income and your investment is also considered “risk-free.” However, similar to other notions in business and finance, a smaller risk also means a smaller potential return.
Stocks. Stocks, on the other hand, are “equities.” Purchasing stocks allows you to become a shareholder in a business and to receive any dividends (profits) that owners get. Unlike the steadiness of bonds, the value of stocks can fluctuate. Also, because dividends are not requirements, some companies don’t even pay dividends to shareholders. Even if there is a risk of you losing your investment, stocks have high potential returns.
Mutual Funds. Mutual funds are collections of stocks and bonds. Buying a mutual fund means you’re putting your money in with other investors’ money. Some people even hire managers to select the different types of funds to invest in. Overall, the main benefit of investing in mutual funds is that it requires little experience. The idea is that if you pay a professional to pick your mutual funds, then you could earn more money.
These three are the basics of equity and debt investments. Of course, there are a variety of other ways to invest your money. Some options include: saving your money, investing in real estate, collecting precious metals such as gold and even becoming silent partners in businesses. You can put more money into your 401k, save your spare change and even decrease your monthly spending. Any of these things can help you maximize your money. So, what are you waiting for? Work smarter, not harder.
For more information about the basics of investing, visit Investopedia.
