It’s finally time to talk about the kind of investing you probably expect a personal finance blogger to talk about — monetary investments in stocks, bonds, real estate, or other financial vehicles.
Investment is such a neat concept. It’s taking money that you own and turning it into yet more money. Even better, it can do it 24 hours a day, 7 days a week, never takes a weekend break or holiday.
Compounding interest is your friend
Investment is such a great tool for building wealth because of something calledcompounding interest. You probably heard about it in school, but might not have paid it much attention at the time.
Simple interest is what happens when you invest an amount of money and receive a return on it. If you invest $10,000 for a year and receive a 10% return, you have $11,000.
Compound interest is what happens when you start earning a return not only on your investment, but also on the interest that accrued since last time. Sticking with our example above, if you didn’t add any money to your investment, you’d start your second year with $11,000. If you received the same 10% return, you’d have $12,100. That’s $100 more growth than the year before, and you didn’t have to do anything at all to get it.
What can you invest in?
Although most people think “stocks and bonds” when they think of investing, you actually have a ton of different investment options. You can invest in:
- certificates of deposit (CDs)
- precious metals like gold and silver
- real estate
- and a whole lot more.
Of course, just because you can invest in something doesn’t necessarily mean you should. Collectibles like coins, works of art, and rare books, for example, are such specialized fields that generating a return from them requires a lot of time, effort, and extensive knowledge — unless you’re just particularly passionate about art or books, it’s probably not worth it for the average investor.
Do your research
When it comes to investing, you need to know what you’re getting into. All investments carry some degree of risk. Sometimes that risk is negligible and minimal, other times the risk is volatile and unpredictable. Riskier investments may have greater potential for return (although this isn’t always true), but they also have greater potential to wipe out everything you’ve invested.
Increasing your knowledge about the investment is one of the ways to prepare and protect yourself from that risk. If you’re planning to invest in a company, learn everything you can about it. What is the CEO or Board of Directors like? How long has the company been in business? Is demand for their protects growing or waning? Who are their competitors, and what are their competitors doing? Statistical information is important, but so is cultural and social information about the company.
Familiarize yourself with all the details of your investment. What happens when you want or need to withdraw your money? What sort of fees or expenses does this investment have that will cut into your returns? How are these investments taxed?
Scrutinize anyone handling your money
Before you agree to do business with a broker or adviser, check them out. Do they have the proper licensing? Who have they represented? How much experience do they have, and how do they get paid? Have they ever been disciplined by a government regulator or sued by a client?
Pay attention to how you came in contact with the broker, too. Did you seek them out on your own? Were they recommended by a friend or colleague? Did they call you up out of the blue, with no explanation how they came to know about you?
You have a time limit
You can increase your income at any time. You might launch a new business when you’re in your 70s and grow it into a multimillion dollar enterprise, if you have the right idea and the methods to effectively execute it. And if disaster strikes and you lose money, you can generally find a way to make more.
But investments take time to work. Time is finite — once a year passes, you can’t reclaim it. The sooner you invest, the more time your have for those investments to grow, which means more years of compounding interest driving your balance higher and higher.
Should you invest if you’re in debt?
This is always a tricky question, and the best answer for it is “maybe.” It really depends on how much debt you have and at what interest rate. If you have $1,000 that you could either invest or use to pay down the balance on a 22% APR credit card, you’re almost always better off putting it towards the credit card — few investments will gain a high enough return to offset or supersede what the credit card will cost you in interest payments.
The more you pay on your debt, the sooner you get out of debt. When you’re debt free, all of your money that doesn’t go to expenses can be invested.
On the other hand, investing has benefits that debt doesn’t. Some investments are tax-deferred, meaning you won’t pay taxes on that money until you withdraw it. Some investments like your company’s 401(k) retirement plan may come with an employer match — if you don’t invest in the plan, you’re literally saying “no thanks” to give up money that your employer wants to give you.
The best option, of course, is to do both, but that requires more disposable income that some people have. That doesn’t mean its impossible, though. If your primary source of income generates enough to meet your expenses and pay your debt, consider developing a side gig or freelance business in your spare time — you can use that side gig to fund your investments.
Tomorrow: Take A Step Towards A Long-Term Goal
We all have things we want to accomplish “someday,” but unless we take steps towards them today, someday will never get here. Get started on your dreams now.
Are you investing?
Does investing intimidate you? If your employer offers a 401(k) plan, are you participating in it? What aspect of investing do you want to learn more about? Tell us in the comments!