Why save and invest? If you don’t, you would have to save about two thousand ($2,000) dollars per month for nearly forty (40) years to accumulate one million ($1,000,000) dollars. If you invest as little as five thousand ($5,000) dollars per year with a seven (7%) percent annual return, you will accumulate one million ($1,000,000) dollars by retirement. What are you going to do?
Start with savings
Start with saving about ten percent (10%) of your earnings. Your next step is to start investing. Typically, this means a company sponsored 401(k) plan. There is usually a variety of mutual funds which range from conservative such as bonds to aggressive such as sector mutual funds. If you consistently save and invest over a long period of time, you achieve financial security in retirement. Other financial goals are a car, home, education, marriage, children or emergencies.
In accounting, we call it a balance sheet. You list your assets and liabilities and calculate your net worth. Why is this important? You want a benchmark of where you started so you can measure your progress. It is probably the first time you actually take an objective look at what you own (assets) and owe (liabilities). This should be an annual exercise. The goal is your net worth is growing every year. Either your assets are increasing or your debts are decreasing because you are paying off debt.
No matter what your income, savings should be a priority. The next step is to keep your expenses in line with your income. It is real easy to add to you debt and reduce your net worth if you spend more than you earn. The best way to control your expenses is a budget. A budget provides the structure to control your expenses. If you have credit card debt, pay it off. Credit cards are a convenient way to pay for things, don’t borrow to spend more. This is part of your financial plan!
Investments have risks. It is up to you to figure out your risk tolerance and invest accordingly. You can invest in the stock market means investing in stocks, bonds or mutual funds. You can reduce your risk by asset diversification. Diversification attempts to smooth out unsystematic risk events in a portfolio of different kinds of investments. Your investments should not react the same way to economic events. The best way to diversify is a broadly based diversified mutual fund.
What are the best investments for you? You have to determine your risk tolerance and invest accordingly. Mutual funds can be much more diversified than individual stocks. You can buy a quality stock or a basket of stocks in a mutual fund. You may want both or just invest in mutual funds. Remember, you are trying to average seven percent (7%) to eight percent (8%) average return over time. You should be focused on your financial goals and you should monitor your progress.
Investing is long term! What does that mean? Generally speaking it is five (5) year s or more. What is your investing objective? In general, it is to grow your investment to achieve your financial goals. You can invest in fixed interest investments =, but it will be lower than seven percent (7%). You have to come up with a asset allocation of various investment classes to achieve your investment goals. Measure your progress every year and make the appropriate changes to help you reach your goals annually.
It starts with savings! You should save at least ten percent (10%) of your earnings to invest in long term goals such as retirement. By investing, you are putting your savings to work for you. If you don no investing, you will have to save twenty-four thousand ($24,000) every year for forty (40) years to reach a million dollars ($1,000,000). If you invest just five thousand ($5,000) dollars per year, you can achieve the same goal. What are you going to do? Why save and invest?
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Money Beagle says
As long as your investments can, over the long term, achieve a higher rate of return than inflation, then your money will grow for you. The growth is often frustratingly slow, but when you step back over a period of time, the results can be surprisingly positive. Patience is key.
I agree! It is one of the reasons, investing is a long term activity.
Michael | The Student Loan Sherpa says
I think the hard part is being patient on your investments. It is important to find a way get satisfaction from setting money aside for retirement.
Investing is long term and patience is part of it. You can still measure your progress annually and adjust accordingly.