Start putting your money to work for you by investing and reap the rewards of compounding interest. Congratulations on figuring out a budget, raising your emergency fund, eliminating your debt, and finishing your emergency fund! This next step you are going to love because now you actually get to experience something that you haven’t as of yet. You now get to experience your money working for you in the form of compounding interest. This is when stuff starts getting really fun! If you have done the work then you can truly start to enjoy these next two steps as you learn what financial freedom is all about. Now you get to experience your money working for you by earning interest and you get to be extremely generous.
A Word to the Wise
If you’ve ever seem how well compounding interest works then you completely understand the appeal of investing. As tempting as it may be to start investing right away after reading this I strongly urge you to go through the steps and wait to invest until you have accomplished the previous steps.
Investing is exciting, because now you can start to harness the energy of interest in the correct direction. No matter what you invest in always remember to diversify your investments. This is accomplished by investing in multiple areas and in multiple companies which helps reduce your risk. Mutual funds are designed to help do this by spreading your investment out over numerous funds rather than just one. You can further increase your diversity by ensuring that you are covering a broad spectrum of industries. Your investment adviser should explain to you these differences and will help you figure out what option you would like to take.
How to Earn Interest?
Up until now we have been focused on reducing risk and cleaning up some mess from our past. If you haven’t been in debt then congratulations! I wish I had never been in debt, but I was and I paid the price. Now after some hard work I am able to watch my money grow with compounding interest. So how does earning interest work? Earning interest works by investing in some form or another. When your investment does well you earn interest of course the opposite is also possible. If you diversify your investments you can help minimize your risk of loss by spreading the risk out over numerous investments.
Understanding Interest and Investing
When looking at investments it is important to understand what it is you are getting into. If you cannot explain to someone else what you are doing then you need to ask some more questions. If you have not found an investment adviser who is willing to explain things to you then find a different one. There are plenty of advisers out there who are willing to teach you and you will be better off for finding one of them. Your adviser will likely talk to you about risk and may even have an assessment to help get a better idea of how much risk you are willing to take on.
The less risk that you are willing to take on with your investments the lower the interest potential is. The more risk you are willing to take on with your investments the higher the interest potential will be. Remember that interest works both ways and so does risk, that is why it is important to truly understand what you are getting into. Also, understand that by spreading out your risk over numerous investments you can create a portfolio that is overall less risky.
Interest at Work!
Up to now I have not really explained why investing is so popular, but now you will see why. Let’s say that you are 18 years old and have already completed the previous steps. If you invest $200 each month and continue investing that same amount for 40 years you would have invested a total of $96,000 in your lifetime. At 8% interest you would have $692,000, at 10% you would have $1.2 million, and at 12% you would have just shy of $2.3 million. That is a much better rate of return on your money than let’s say paying 8% interest to buy a car.
It is true that the longer you invest the better off you should be which is why you need to get serious. It’s worth waiting 2-3 years until you get rid of your consumer debt and are in a stable financial situation. Waiting to pay off your house until after you start investing is generally a safe practice. Houses typically increase in value, but realize that all debt has risk associated to it. If you do wait to pay off your house, get your investments rolling and get your house paid off as quickly as possible. Remember, the ultimate goal is to experience financial freedom. @hen we owe people money we can never truly be free from the hold of finances over our lives.
Earning interest rather than paying it is the way to go! The faster you decide to drop the debt so you can start investing your money the more interest you can earn. This also gives you the freedom and flexibility to be able to be even more generous with your money which is the next step. Every year that goes by without a change in our thinking about money costs us greatly! Congratulations again for those of you who are reading this who have done the work by budgeting, raising an emergency fund, and getting out of debt. You are well on your way to being able to live life with financial freedom!
I can help you better understand the basics of investing and set you up for success for when you walk into the investment adviser to start investing. There are tons of options and the more you know the better decision you will be able to make about what is best for you and for your financial future. Feel free to contact me at 573-208-4266 to get on track to be able to start earning interest as well as to learn more about investing. I look forward to hearing from you all and may God bless you in your continued journey toward financial freedom.