Investing allows your money to appreciate and grow over time. People invest in order to prepare for retirement, education, or recreation. Before you begin investing, it’s important to recognize your goals in order to avoid common some common pratfalls.
A Primer on Stocks
Although there is no guarantee that the stock market will go up following your investment, the average return of the S&P 500 index since 1926 is slightly more than 10% per year.
Even in this era of high-risk economic climate, investing is a good bet because just allowing your money to stagnate will not provide for a comfortable retirement. Even if you were not able to begin investing at the age of 20 (or even 30), starting late is still better than not starting at all. Through compounded returns, you can make up for some of your lost time anyway.
One very important tip: You shouldn’t start investing while you are paying off credit card debt. It’s much smarter to pay off your debt (which accrues interest) than to put the same amount into the market.
Choosing the Right Way to Save
Once you’re debt free and ready to invest, the next step is to make sure you know how much money you’ll need in the next few years and what money you can afford to set aside and let grow. Once you have evaluated your situation, you’ll need to choose how to split up your assets.
The stock market is typically better for longer-term investments while CDs usually better suit short-term investments. A Money Market fund might work better than stocks if you’ll need money for a down payment on a house or for a vacation next summer.
While not every expense can be planned in advance, it is not financially viable to continuously trade in and out of the market. Fees for frequent withdrawals could offset returns, and gains from long-term investment could be missed if you don’t display the patience necessary to let them mature.
Play It Safe or Take Some Risks?
The biggest question you will have to ask when coming up with an investment strategy is if you want to play it safe or take a more risky approach. As a strategic rule, always make sure you are taking advantage of programs offered through your benefits package, such as a 401(k) with matching contributions — essentially free money.
Beyond programs like those, there’s really no such thing as a safe bet, so keep in mind that long-term stock investments will offer long-term rewards and that daredevil opportunities with high rewards are likely to come with some high risks.
The math is simple: If you start with time, add patience and multiply by the funds you possess now, you could be better off in 10, 20 or 30 years than you are today.