Let’s face it, we all want more money. And generally, the quicker the better. If we can earn money without having to work extra hard or extra hours for it? Even better. Investing in one way of doing just that. In short, investing is when you purchase an asset that you anticipate will grow in value and result in profit for you sometime in the future.
Saving money and investing both require you to put money away for a later date, but they are not the same. Saving money generally takes longer than investing, and it pays a low amount of interest on the money you are putting away. Saving is a good approach if there is something short term you are looking to purchase, as it is risk-free and readily accessible.
On the other hand, investing is better suited for medium or long-term goals. They have a higher potential for growth but are also subject to fluctuations in the stock market, thus they are not always optimal to draw from for cash. To that end, it can sometimes take days to have the money settled and in your hands. With that in mind, let’s dive deeper into how investing works.
Investing to Build Wealth
As stated, investing is a method for putting money away in hopes of asset growth. Putting money away so it can grow is beneficial for supplementing oneself financially, whether it be for things such as purchasing a home or having funds for your retirement. Investments are made with far-away goals in mind and can span years or decades. When you continually invest, the interest on investments with strong stock market values continues to compound and grow in value. Or in the case of a home as an investment, keeping up with the property and development in the area should make the value of the home appreciate, or in other words, grow in value. When you eventually sell the home, you will make a profit.
We will highlight several types of investments below, along with various attributes to consider when investing. Overall, investments typically involve stocks, bonds, life insurance, mutual funds, real estate, savings, and more.
Before You Invest
Have a Timeline
Before investing, you should make sure you are clear on why you are investing and what you would like the outcome to be. Determine what your savings goals are to create an investment timeline. Knowing when you anticipate cashing on the investment can help in deciding the level of risk you take on with your investment(s).
Assess Your Risk Tolerance
Unlike saving money, investing always involves some degree of risk. Think of your investment timeline to determine the right level of risk for you. If you tend to stress at the prospect of losing any money, you may be better suited to have a more conservative, or low-risk, portfolio. This may mean your investments will grow slower, but there is a degree of predictability that comes with playing it safe.
There are varying degrees of risk for investing. If you have heard the saying “high risk, high reward,” it likely came from investing. Not all assets are going to grow or stay consistently in demand. This leads to fluctuations in value and subsequent payouts – otherwise known as dividends- to investors.
Forms of Investing
Certificates of Deposits, or CDs, and Money Market Accounts typically offer higher payouts than a standard savings account. The return on these is available because you are committing to the money staying in that account for a set period. Bonds are also another form of investment, usually to a company or government that comes with the contingency that you will be paid back with interest within a given time frame.
Higher Risk Investments
Stocks are a slightly higher-risk investment. By purchasing a company’s stock, you become a partial owner of them. When the company does well, then you will too. Conversely, if there is a downturn, you will also see a decline in your investment. For that reason, there is great variance in how stocks perform.
In many cases, investing requires purchasing large shares, which can get pricey quickly. For that reason, some investing platforms break purchases down into smaller chunks called fractional shares. These allow you to get started with investing and add to the pot over time while still enjoying a small return on your money. Additionally, platforms like this often help you automate your investing with “set-it-and-forget-it methods” and round-ups on purchases you are making so you stash money in investments more often and more frequently.
Deciding which investments to make is an important step. Make sure they align with the goals, timeline, and level of risk you have in mind for growing your money. Next, tending to your investments and monitoring their success is key. There are several strategies you can employ to see success with your investments.
Diversifying your Portfolio
A portfolio is essentially your collection of investments. One way to mitigate the risk that comes with higher risk investments is to put your money into many investments. This includes several approaches. One might be purchasing bonds and investing in the stock market, or you might invest in different asset classes of the stock market. Overall, this ensures you do not put all of your ‘eggs’ in one basket in the event of an economic downturn.
Invest ASAP and Invest Often
There is no better time to get started than right now. Time is on your side, so the longer you put your money away, the longer it has to grow. Making regular investments, even in small increments, can add up over time. It also helps you establish the habit of putting your money away before you can spend it.
Investing is a great way to grow money and save for your future self for a variety of purposes. Though there are many ways to do it, this means that there are plenty of options to suit your exact investing needs. Knowing your investment goals ahead of time will help immensely with growing your money.