Why should I invest my money? How do I get started with investing? What is compounding? If you've ever wondered about these questions, specifically when it comes to investing in the stock market, you are in the right place!
Why should you invest your money?
Investing is how you grow your money. Simple and short. Putting money in a savings account is great for the short term i.e. for things like your emergency fund, saving for a house down payment or money you need easily accessible or will need within 5 or so years.
However, for the long-term (for instance retirement), investing your money is the way to go especially given the very low-interest rates on savings accounts (less than 1% on average in the US) - you are basically making no money!
What is it about investing that grows your money?
A higher rate of return (compared to a regular savings accounts) PLUS the power of compounding, which is what grows your money. The average rate of return on the stock market since 1929 has been around ~7% and so assuming you earn the same average return of 7% on your retirement investments over the next 20 to 30 years plus compounding, we are talking about quite a large nest egg! Now wouldn't that be great?
So how does compounding work?
Compounding is the process by which your money grows from reinvesting your earnings over time. Let's look at a very basic example. Let's say you invest $1,000 today and you earn 10% on it, at the end of one year you’ll have $1,100.
If you leave the $100 that you earned alone and don’t invest anything else, at the end of the 2nd year of earning another 10%, you will have $110 in earnings with an overall total of $1,210. If you leave it for 10 years, you'll have $2,593. Over several years, it adds up nicely. That is the power of compounding.
But what if you don't want to invest in the stock market?
If for whatever reason you decide the stock market is not for you, there are other avenues to invest your money. For instance, investing in real estate or in business - again, it should be for the long term.
Important things to keep in mind
When it comes to investing in the stock market (or any other avenue for that matter), the past performance of the market is not an indication of future performance but historical trends matter.
Also, keep in mind the stock market and other avenues have their cycles; markets go up and down, there are recessions and depressions (imagine LOSING 50%+ of your portfolio) and booming economies as well (imagine GAINING 50%+ on your portfolio).
Investing should be for the long term, I cannot repeat this enough. Investing for the long term allows you to grow your portfolio, whether the storms and make gains. This is why investing for retirement if it is several years ahead of you, is ideal.
Also, it is super important that you DO YOUR RESEARCH. Understand any and every investment you are making, any regulations or limitations around it, the risks involved, any associated fees etc. So you can make informed investment decisions.
Remember, investing is how you build real wealth and it is not something to be afraid of as long as you stick with it for the long term and you do your research. So if you've been wanting to invest your money, start now while you still have time on your side!