The Basics of Investing and Why You Should Invest Now
You work to earn an income so that you can cover your expenses and hopefully save for the future.
Planning for the years ahead can be challenging. If your retirement is many years away, you might be wondering how much you actually need to save up. The answer, of course, is “it depends.”
It depends on the lifestyle you want to have when you retire. If you’re planning on travelling the world, you’ll likely need to save up more than the person who plans on sticking around their hometown in their golden years. Regardless, the most important thing to remember is that you should start saving and investing for your future—the sooner the better.
Saving up hundreds of thousands—even millions of dollars—seems daunting, and amounts to years upon years of annual salaries. With savings rates incredibly low, the task seems more like impossible. But, there is a solution that will help you grow your wealth for the long run (and it’s what we write about all the time): Investing.
Many millennials are scared of investing. The potential swings in the market make people feel uneasy. However, investing will give you the upper hand in the long run, and will get the ball rolling with your wealth. Investing can enable you to earn double-digit returns, which makes it far easier to meet your lofty retirement goals. Compounding your wealth will help your investments snowball into a blossoming nest egg that will be able to sustain you later on in life.
If you’re looking for types of investments, you may want to consider the following:
- Bonds: In simple terms, you’re lending a company your money and, in return, they pay you back with a prespecified amount of interest. Typically, bonds are lower-risk investments and generally are inversely proportional to the stock market.
- Stocks: When you purchase a stock, you’re buying an ownership unit of a company. Stocks are traded on exchanges such as the Toronto Stock Exchange or the New York Stock Exchange. You can buy and sell units of different companies, and these shares may pay dividends that are typically small, quarterly payments into your accounts. Additionally, if the stock price increases in value, you may sell the share and realize a profit.
- Mutual/Index Funds & ETFs: These funds own a multitude of stocks or a specific index. You are buying an ownership unit but a much more diversified unit than a specific stock or bond. These are also traded on the stock exchanges. These are great vehicles for new investors, as they’re well diversified.
Investing is far more risky than a simple savings account but it will also yield higher returns. If you’re planning to invest your money for that horizon in the future, you should invest in more risky securities, (after you’ve done your research, of course). Your portfolio will go up and down over the years but the long-term trend will be upwards, and your nest egg in retirement will be better for it.
Investing is one of those things where the earlier you start, the better. The longer your investments last, the more likely they are to compound, and compounding your money will make it grow exponentially.
If you’re aggressively paying down your debt, you should consider socking a little bit of money away into investments. Not only will this get you into the habit of investing money and accepting risk, you won’t be starting from zero when your debt is gone. Many people focus on paying down their debt—which is awesome!—but they can be left with a net worth of zero when it’s all said and done. This can be incredibly defeating for someone who has exercised such aggressive frugality over a long period of time.
By putting away $100 a month and investing it for the two years you are paying down your debt, you will not only have $2,400 saved, it will have earned interest and begun to grow into the nest egg you’ll need later on.
Flickr: Lori L. Stalteri