You work hard for your money — now it’s time to make your money work for you. When you invest, you have the chance to build wealth and diversify your streams of income. Here’s a look at what investing can do for you.
Options to suit every investor
Maybe you want to invest, but you can’t afford to risk losing large sums of money, or you’d like your assets to remain liquid. Or perhaps you don’t want to babysit a stock ticker, waiting for the right time to sell your shares. However, investing goes far beyond day trading. There are a wide variety of investment vehicles, designed to suit different budgets, lifestyles, and risk tolerances. Savings bonds, certificates of deposit, fixed annuities, and dividend-paying stocks are lower-risk, lower-reward options. If you’re more of a high roller, Marissa Parietti of Investopedia lists currency trading, foreign emerging markets, and venture capital as choices to consider.
The power of compounding interest
Compounding interest allows your savings to snowball. For example, if you start with an initial investment of $1,000, contribute $50 per month, and earn 10 percent in interest every year, compounded annually, you could have over $40,000 after 20 years. Since compounding interest needs plenty of time to work its magic, finance expert Justin Pritchard suggests that you start investing as early as possible.
Don’t lose money to inflation
Inflation causes money to lose value over time — which is exactly what will happen if you keep your cash squirreled away in an envelope under your mattress. According to Kimberly Amadeo, a contributor to The Balance, stocks typically return about 10 percent per year, so on average, your money will gain more value than it loses from inflation. However, Amadeo warns that dips in the market occur, so you should be prepared to delay selling your investments until prices recover.
Take advantage of pre-tax dollars
Some investment vehicles allow you to lower your tax liability while you grow your money. For instance, 401(k) plans and traditional IRAs allow you to invest pre-tax dollars that you earn throughout the course of your career. The Balance contributor Dana Anspach explains that you’ll eventually pay taxes when you draw upon your investments in retirement — but by then, you’ll be in a lower tax bracket, and therefore, pay less in taxes than if you’d simply kept the money in a savings account.
Secure your retirement
In addition to providing tax benefits, investing can enable you to have the money you need to make your golden years less stressful. Retirement consulting company CEO Denise Appleby explains that there are a few pitfalls that non-investors tend to encounter later in life. Without investments to live on, Appleby notes that you may have to rely on financial support from your family or be limited to living within the means of your Social Security checks. If you don’t want to compromise your independence, investing may help you reach your financial goals.
Need help getting started with investing? Consider consulting with a financial advisor or an investment expert, so you can develop a plan that suits your lifestyle.