People who are new to investing may not understand the difference between saving money and investing. Each has a purpose and will play a specific role within your long term financial strategy.
When starting on your journey of building wealth, you must understand the two fundamental ways of making money. The first is to earn an income, while the second is to invest your current assets so they increase in value over time.
Nowadays, money that is sitting in a checking or savings account is not going to accrue very much interest. The typical savings account has an annual yield of less than one percent.
Contrast that number with the roughly five to ten percent you could earn every single year by investing in the stock market. That means a person who puts in $10,000 into the stock market today could have close to $20,000 in a decade.
Now imagine you save even more money over time, and continue to invest that money through various channels. You can easily triple or quadruple your lifetime earnings, and that is while being conservative with your investments.
When to Invest Money
There is a misconception that a person should not start investing their money until later in life. The opposite is true – the time to start investing is now.
When you start building wealth from an early age, you have more opportunities to take calculated risks. You are not close to retirement age, which means you can put your money into investment vehicles that may carry more risk but also come with a higher payoff.
Maintain Emergency Savings
Even if you begin investing money at an early age, you should have an emergency fund that you can use during difficult times. Such a fund should have enough money to cover all your expenses for six months.
When you have built up enough savings to live comfortably for six months if you suddenly lose your job, you can begin investing your money.
Where to Invest Money
Risk tolerance, time to retirement and savings goals will play a factor in determining where you invest your money. Someone who is younger and wishes to retire a millionaire may invest in slightly riskier ventures, while a person in their mid-50s may want to stick with stable investments that guarantee solid returns.
Some of the better investment options for people with various financial goals include:
- Certificates of Deposit
- Government Bond Funds
- S&P 500 Index Funds
- Real Estate
Certificates of Deposit
A CD is issued by a bank and offers a higher interest rate compared to a savings account. These deposits mature over a specific period, which may be one year, three years, ten years or twenty years.
While a CD is not as liquid as some other investments, it can generate a very reliable return for people who are approaching retirement age and want to boost their nest egg without losing any of their existing wealth.
Government Bond Funds
A government bond fund is a mutual fund that invests money in debt securities put out by the United States government. These funds put people’s money into T-bills, T-notes and T-bonds, along with mortgage-backed securities.
Beginning investors who want to slowly build up wealth without taking on much risk or seeking knowledge of the market can trust this low risk investment.
S&P Index Funds and Stocks
The S&P Index Fund is based on the stocks of hundreds of American companies, such as Walmart, Apple Berkshire Hathaway and Microsoft. Investors can assess the historic returns of nearly all reputable S&P Index Funds before deciding where to put their money.
Those investors who have more knowledge of the market, or prefer a hands-on approach to investing, may want to put money into individual stocks. Such a process requires a lot of research, time commitment and also carries increased risk.
Real Estate and Gold
Real estate is an excellent investment opportunity for people who desire a stable secondary income. By putting down a modest security deposit, securing a mortgage and investing in property in up and coming areas, you can guarantee rent income from a residential or commercial client for many years.
Gold is also an appealing investment, as its value always increases over time. Investing in rare materials such as gold can also act as a hedge for other investments, as gold prices tend to rise when the stock market is performing poorly.
By carefully investing your money in one or more of the above investment vehicles, you can turn your income and savings into a substantial nest egg by the time you reach retirement age.