Many people feel uneasy when it comes to investments due to the cloud of mystery that hovers over it. But investing is not as elusive as people think. It is designed to help you build your wealth over time. Wealth management is not an easy feat for many families, so I am here to share with you 3 ways that investing can broaden your financial horizon.
Investing is the practice by which a person commits money or assets to a third-party endeavor in hopes of earning a profit over time.
There are many channels for investing:
- Mutual funds
- Businesses and start-ups
Grow Your Wealth
Growing wealth is not just for the wealthy. Everyone can take practical measures to grow the money that they have. Investing is a great strategy to employ because of its proven increase of returns. It is important to know that there is a big difference between saving and investing. By saving, you put your money in a secure bank account that slowly grows interest over time. With investing, you put your money in areas with high interest rates and higher returns.
Compound interest works in your favor when you invest. Compound interest is the idea of interest building on interest, and in terms of investing, could make you a solid profit. Savings accounts are not sporting high interest rates of late, most falling below 2% with an average of 1% or less. This does not provide a solid rate for the growth of your money. You should still have money in a savings account for emergency purposes, but any money leftover gives you an opportunity to invest.
When investing you should also assess your risk tolerance which can (and often does) change over time. Younger people often have a higher risk tolerance and it seems to steadily decrease overtime once there is more to lose.
On average, people who invest see more financial growth and are able to achieve big ticket goals throughout their lives.
Every working person is saving for retirement. A topic discussed at length, retirement savings is one of the most crucial savings accounts of the modern world. It will be the income that supports a retirement lifestyle and supplies the funds for your life.
Many employers offer workplace contribution accounts to help encourage employees to save. Most recognizable as a 401(k) or 403(b), these accounts offer the benefit of a diverse investment profile which can be drawn upon when you retire.
401(k)s are contributed to on a pretax basis meaning that you are not responsible for paying income tax on the money you funnel into this account. Another residual benefit is that by contributing money to your 401(k) you also reduce your taxable income.
These accounts often come with an employer match. If you contribute a certain percentage of your paycheck to the 401(k), your employer will match that amount often up to 6%. I advise you to contribute the maximum amount you are able to qualify for the employer match so that you do not leave money on the table. The match will also allow you more money to use in your investment portfolio.
Reach Big Financial Goals
The benefits of investing can help you accumulate enough money to help you reach some of your biggest financial goals. What financial goals do you have this year? How do you see those evolving in 5-10 years? Making a plan for the type of lifestyle you want to live will help motivate you to save and invest until you get there.
Since investing can lead to increased returns, the practice has helped people reach many big financial goals such as:
- Buying a house
- Opening a business
- Putting kids through college
- Buying a car
Investing is more diverse than endlessly trading stocks on Wall Street. There are many investment options available to you and I encourage you to look into a few that interest you. Diversifying your investments and savings will put you in the best shape to earn enough money to live the life you always dreamed of for yourself and your family.