The point of investing is to put away money in order to increase the sum over time, whether through savings accounts, stock trading, bonds, and many other options. Investing your money not only increases the value over time, but also protects the amount you already have from losing its worth due to inflation. Inflation is when money gradually loses its value because of price increases. Another benefit of investing is the idea of compounding interest. Money that earns interest will grow at constant rate with the same payment of interest at the end of every time period, but the more money added to the pot the more interest that is paid each time period. This causes the money to increase in value exponentially, known as compound interest.
Once you have set aside enough money to begin an investing endeavor, it is best to have a strategy of approach in order to achieve the highest reward for your money. Be aware that some investing options require minimum amounts or restricted access to the money over a period of time. Be sure you are able to afford investing after you have met the requirements of health insurance, life, insurance, auto insurance and any other necessary means in your life. Similarly, debt – especially high credit card debt – should be paid off before you begin investing.
Savings and investing funds that are not used as regular monetary means should be separated. While a savings account will accrue interest each time period, you should have money you can access for large near-future purchases as well as in case of an emergency. The best measure of how much you should have in an emergency amount is to determine how much you would need to cover bills for at least two months in case of unemployment, or else enough to cover major auto repairs or similar unexpected expenses.
There are several other investing options that will build up your investment much faster than a savings account but will not be as easily available to withdraw. Investing these funds will be for outpacing inflation, taxes, and other drains of finances, as well as a means of financial security. Because of the potential higher returns, this type of investing is also a higher risk than simple savings. One of the first aspects you should consider when investing is determining when you will need or want to extract the money. Certain circumstances such as buying a house, paying for a college education, or having money for retirement will have speculative time frames you can base around. Knowing when the money will be needed will better outline the type of investing you are able to do.
After you decide upon the best opportunity based on your needs and investing funds, you can increase the value by continually adding more money to your first investment. If you follow a balanced schedule or even just invest minor additions here and there, all you have to do is watch your investing grow and grow.
By Monica Drusch