Why Should You Invest
by Justin Vencel
Saturday, September 4th, 2010
There are many worthwhile and compelling reasons why one would want to invest their savings, actually there is only one:
Building Wealth
The overall process is quite simple, you want to take the money you already have (your assets) and use them to make more money. You can in turn use this money for many needs such as inheritance, eduction, retirement, or entertainment. Luckily with a wealth of online discount brokerages and investment information, the actual act of investing has become quite painless. To help you along your path to investing success we have put together a few key points to concentrate on as you begin your journey into wealth building.
Set Goals
Why are you investing? Do you need to send you kids to college? Ensuring a steady income for retirement? Buying the house of your dreams? Planning to travel the world? There are a million reasons to invest.
Let's take that $1000 you have been saving and invest it into the stock market assuming a rate of return of 10%, the historical average for the S&P 500. After 30 years your $1000 will have ballooned to $17,449.40, all with just a few mouse clicks. How about another example. If you can save $1250 a year (just $5 a day not including the weekends), for the next 45 years at the same 10% rate, you will have amassed a staggering $988,494.15 at the end of that time period. Are you starting to see the advantages of investing?
The importance of Compounding
There is a little secret behind the two examples above that makes long-term investing so powerful...Compound Interest.
"compound interest is the eighth wonder of the world" ~ Albert Einstein
The table of numbers below shows the power of compound interest over many years
| Year | 5% return | 10% return | 15% return |
|---|---|---|---|
| 1 | $2,100 | $2,200 | $2,300 |
| 10 | $14,835 | $20,124 | $27,394 |
| 20 | $37,372 | $69,730 | $134,176 |
| 30 | $74,082 | $198,392 | $566,168 |
| 40 | $133,879 | $532,111 | $2,313,817 |
One of the first things you may notice is that the longer you leave your money in the market, the more money you make. Remember, it takes money to make money. This means that every time you are paid interest (earn a return) you begin making money on not only the original amount but also on your return. This effect can cause your investment amount to increase quite rapidly and only increases as time goes on.
Compounding your investment is the most important reason why you should not wait another day to start investing your money. Every day you money is invested is another day you are earning interest on that money, in other words, you money is working for you.
Avoiding Common Mistakes
- Not investing at all Trying to predict what the stock market will do is a losing bet because there are no guarantees. But leaving all your money in cash is guaranteed to lose you money. Every day that goes by your cash is worth less because of inflation and does nothing to full-fill the dreams you have to build wealth.
- Investing with credit card debt Many credit cards carry very high interest rates and if you have any outstanding debt associated with any credit card consider paying that off before investing. It's easy to see how a credit card you are paying a 22% rate on will adversely affect your investment making only 10%.
- Waiting to invest As you saw from our compound interests examples above, the longer you wait the money money you are leaving on the table. Start now, start now, start now.
- Short term investing Try to invest with money you will not need in the next 3 to 5 years. Remember that the market is unpredictable and investing for less than a year will cause your earnings to be taxed at your regular tax rate instead of much lower long-term capital gains amount of 15%.
- Missing free money If you have an employer that offers a company matched 401k plan and you are not currently enrolled...do it now! The company is essentially offering you free money, and how turns down free (and tax free) money?
- Gambling instead of investing If you want to gamble your money go to Vegas, if you want to invest go to the stock market. If you feel you can't help but take unwarranted major risks, then maybe the stock market isn't for you.
- Over trading This is synonymous with 'Day Trading' where you constantly trade stocks hoping to time the market on up and down swings. Not only is impossible to guess what the stock market is going to do and excessive trading will eat away at your returns with the extra fees and transactions involved.
Congratulations, you are well on your way to becoming an investor. Armed with your new knowledge of compound interest and the common mistakes to avoid it's time to start looking into what various types of investment opportunities are out there. Have fun investing!
"Everyone has the brainpower to follow the stock market. If you made it through fifth-grade math, you can do it." ~ Peter Lynch
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