Most importantly, you need to hold onto the money you earn. And then, you need to grow your money. In order to grow your money, you need to learn how to invest.
When you become an investor, you’ll be using your money to acquire things that offer the potential for profitable returns through one or more of the following:
- Interest and dividends from savings or dividend-paying stocks and bonds
- Cash flow from businesses or real estate
- Appreciation of value from a stock portfolio, real estate, or other assets
As you learn to become an investor, you will begin to devote your limited resources to the things with the largest potential for returns. That may be paying down debt, going back to school, or fixing up a two-family house.
Of course, it may also mean buying stocks and bonds, or at least mutual funds or exchange-traded funds.
Thanks to advances in technology, you can start to invest with as little as $5 a month and a smartphone. It’s our job to help you filter out the noise, learn the basics, and make good investment decisions from the start.
With no fees on accounts with low balances and easy automatic investing, Wealthfront is our top pick for a best all around investment account. If you want to learn more about them, read our Wealthfront review.
So here are the basics of how to invest—wisely.
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Investing allows you to significantly grow your money over time thanks to the power of compound returns.
Compounding can be called the Eight Wonder of the World. Thanks to the power of compounding, a single penny could grow into millions of dollars, given enough time. You may not live that long, but consider the following examples.
Say you start investing when you’re 16…
As unrealistic as it may sound to start investing that young, say you got a small inheritance and you decided to invest it—if you put $5,000 in an account with an interest rate of 7 percent and contribute an extra $200 a month, after 30 years you’ll have a little over $284,000.
Using a more realistic example, say you start investing when you’re 22, right after graduation…
You start out just putting $50 a month into your 401k, with a 50 percent company match.
If you raise contributions by the same amount as any pay raises, you’ll have more than $1 million by age 65. That assumes annual raises of 3.5 percent and an 8.5 percent return on 401(k) investments.
While there are many factors to consider—a simple example like this demonstrates the power of compound interest if everything goes right.
So if you want to start saving now, you could even have a whole year’s salary saved by the time you’re 30…Take a look at the chart below to see how.
When should you invest?
Now that you know why you should invest, how about when to invest?
Investing sounds more intimidating that it is. Yes, there’s always a potential risk for loss, but there’s an even bigger potential for serious gain.
Doing anything for the first time can be terrifying, especially when it involves your hard earned cash. But here’s some advice for first time investors.