Start putting your money to work for you by investing so you can reap the rewards of compounding interest. If you have already gone through the work of figuring out a budget, raising your emergency fund, eliminating your debt, and finishing your full emergency fund then this next step you are going to love because now you actually get to experience something that you have not gotten to up to this point. You now get to experience your money working for you rather than you just working for your money. This is when stuff starts getting really fun and 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 by watching your money grow as well as by being increasingly more generous with your money.
A Word to the Wise
If you have ever sat down and figured out how compounding interest works then you completely understand the appeal of investing. If you have never done this then let me preface this article by saying that as tempting as it may be to start investing right away after reading this and you are still living without a budget, without an emergency fund, and with debt then I strongly urge you to go through the steps and wait to invest.
Investing is exciting, because now you can start to harness the energy of interest in the correct direction. Whether you are investing in stocks or bonds it is important to remember that diversifying your investments by investing in multiple areas and multiple companies helps to 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 Does Investing Work?
Up until now we have been focused on reducing risk in our present and cleaning up some mess from our past. If you have never been in debt then congratulations! I wish I had never been in debt, but I was and I paid the price, but after some hard work I am now in a place where I am able to watch my money grow. So how does earning interest work? Earning interest works by investing in some form or another. When what you have invested in does well you earn interest, of course the opposite is also possible and sometimes you don’t earn as much or maybe even lose, but if you diversify your investments you can help minimize your risk of loss by spreading the risk out over numerous investments.
For more information about how investing works click here to read more about investing for retirement.
When you are looking at investments it is important that you understand what it is you are getting into. If you cannot explain what to someone what you are doing then you probably do not have enough information yet, so you should ask some more questions. If you have not found an investment advisor who is willing to explain things to you then find a different one. There are plenty of advisors out there who will take the time and you will be better off for finding one of them. Your advisor 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. Basically speaking, the less risk that you are willing to take on with your investments the lower the interest potential is, while 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. It is also important to understand that by spreading out your risk over numerous investments you can create a portfolio that is overall less risky.
Watch your Money 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 have an extra $200 that you can invest each month and continue investing that same amount for 40 years you would have invested a total of $96,000 in your lifetime and you would have $692,000 if you earned 8% interest, $1.2 million if you earned 10%, and just shy of $2.3 million if you earned 12%. 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, but it’s still worth waiting 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 because a house will typically increase in value versus any other form of debt that there is. If you do wait to pay off your house though, get your investments rolling and get your house paid off as quickly as possible. Remember, the ultimate goal is to experience financial freedom and when we owe people money we can never truly be free from the hold of finances over our lives.
Let’s look at one last set of numbers to wrap things up. Let’s suppose that instead of starting to invest right away you wait and you live life in the moment. Instead of living a lifestyle of financial freedom you spend freely with your money until you turn 40. You are starting to think more about retirement now because you are getting older. How much will you have to invest each month in order to equal the $692,000 that you earned at 8% over 40 years? Assuming the same end point of 58 years of age you would have 18 years of investing and it would cost you $1440 a month for a total of $380,870 of your own money invested. The 22 years that went by cost you an extra $284,870 in order to reach the same goal.
Earning interest rather than paying it is the way to go. The quicker you make a decision to drop the debt and the payments and start investing your money the more your money will be able to grow. This also gives you the freedom and flexibility to be able to be even more generous with your money which is the next step. Each 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!
Though I am not an investment advisor and I do not have anything to sell you other than information I can help you better understand the basics of investing and help 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.