Investing money takes time and patience, but the rewards are tremendous and long-lasting. By saving money long-term and preparing for life after your career is over, you'll really put the "golden" in golden years. There are some things that you must know about investing if you want to make the most of your money and time.
Five years is the benchmark to use to determine whether to save or invest. There is a difference. Saving is more short-term, while investing is long-term. For example, if you are planning to buy a car soon, you'll want to save a pre-planned amount each month in a basic savings account. You're just looking for a safe place to put the money, so don't worry about earning interest. After several months, you can go buy the car (look for a good bargain and use the power of cash to get a discount).
On the other hand, if you have a five-year-old child and want to start saving for his or her college fund, then you want to invest. If you are planning to retire in 25 or 30 years, you would invest money, rather than just save it. In terms of investing, put your money in good growth-stock mutual funds with at least 10-year track records. Put 25% of your money each in growth, growth and income, aggressive growth and international funds.
The reason that you invest your money when you have a lot of time is just that: time. Over any given five-year period, 97% of the mutual funds on the market make money. Not only that, but the stock market has averaged a growth rate of 12% per year over the last 70+ years. Not only is time on your side when it comes to investing, but solid performance by the market is as well.
That doesn't mean a solid growth curve of 12% each year is guaranteed. It means one year the market might grow 7%, the next year 10%, and the next year 19%. That comes out to 12% per year, and since you leave money in an investment for several years or even decades, then you come out a winner there.
Let's look at an example. If you want to retire at age 65 and start investing just $200 a month at age 45, you'll end up with about $193,000. That won't cut it if you're going to spend 20 or 30 years in retirement and expect to live off the interest. If you begin investing that same amount at age 35, you'll have almost $649,000. Better, but probably not good enough. If you start at 25, though, you'll finish with over $2 million! You'll be able to retire with dignity, give money like you've never given before, have serious fun, and leave a huge blessing to your spouse and children.
You get out of investing what you put into it. The sooner you complete the first three Baby Steps, the more time you have to grow your money, and the bigger the payoff will be. When you get to Baby Step 4 and start investing 15% of your income, over time the interest you earn just goes nuts! Use that as motivation to drill through your Baby Steps and get to investing and serious wealth-building!
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