Inve$ting Your Way to Wealth

As you stare at the pile of change you’ve been saving up all week to go out this weekend, the idea of having enough money to actually invest can seem a bit far-fetched, at best. However, by educating yourself early on how to invest and why it’s so important, you’ll be equipped to take charge of your financial future. Who knows, maybe someday dinner will be on you.

Why Invest?

Did you know that by leaving your money in your checking account you're actually losing money every year? That's because of inflation. Every year, the value of the dollar decreases by about three percent, which is why your checking account should only be for money you need access to for daily expenses. The rest of your money should be earning an interest rate that is higher than the rate of inflation. Otherwise, you might as well just keep it all in a shoebox under your bed.

While a savings account or money market account is a good place for an emergency or "rainy day" fund, it isn't a practical place to grow your money for the future, simply because the interest rate won't be substantial enough. Wise investing can grow your money exponentially.

Understand Investing

The jargon used in the financial world can be a little intimidating at first. However, it's important not to let your uncertainty overwhelm you. Once you begin investing, you'll catch on quickly and be able to see through the jargon. Many investing Web sites, such as www.motleyfool.com, offer explanations of terminology and educate would-be investors on the different investment classifications.

You may be thinking that you don't have enough money to invest - investing is something your dad worries about, not you. But what you lack in finances, you can make up for by starting young. Even if you start small, the longer you have to invest the more your money will grow.

Take this example: Let's say you start investing $2,000 a year at age 25. You continue doing this until age 35, then stop. Assuming a nine percent rate of return compounded monthly, you would have $525,344 at age 65. In contrast, if you started saving $2,000 a year at age 35 and continued to set aside that amount every year until age 65, you would only have $290,427, assuming the same rate of return and compounding monthly. Youth certainly has the advantage in terms of investing!

How to Invest

There are two words that are vital to the sucess of any investor: portfolio diversification. This is the financial equivalent of not putting all your eggs in one basket. When you're young, you can afford to be riskier with your investments. This may mean that you choose to invest in stocks, which have a higher rate of return but carry a greater risk vs. bonds, which have a lower rate of return, but are much less risky. However, it is still important to choose a wide range of stocks. That way, if one segment of the market isn't doing so well, you have a greater chance of doing well in another segment. A mix of international and domestic stocks is a good idea, especially in today's market. You'll also want to make sure your investments are spread out over a variety of companies.

One of the easiest ways to ensure that your portfolio is well-diversified is by investing in a mutual fund. Most people are familiar with mutual funds. These are funds that invest in hundreds of different companies, ensuring a broad investment portfolio. A fund manager is responsible for buying and selling stocks in order to provide the best rate of return possible. This is a good option for people who are new to investing; however, it's important not to simply invest your money and forget about it. It's a good idea to review your fund's performance regularly.

Liquidity

Liquidity simply refers to how quickly you can convert an investment to cash without losing money. This can be important if an emergency comes up and you need quick access to your money. You don't want to be faced with stiff penalties for withdrawing your money when your car's transmission needs replacing. The more readily you need your money available, the more important liquidity is.

Staying in for the Long Haul

At times, investing is not for the faint-hearted. It can be disconcerting, to say the least, when the market has a bad day, and you watch your stocks drop like stones. However, in order to earn any sort of return on your investment, you must be willing to ride out a bit of volatility. Patience is a virtue investors can't afford to forgo. Now, don't confuse patience with ignorance - if you have a stock that is consistently under-performing, don't hesitate to sell it. But one bad day doesn't mean you need to immediately reevaluate your entire portfolio. Keep in mind the five percent rule: most investors will advise you that if your stock loses more than five percent of its value, you should sell. So try not to let one bad day affect your outlook. Investing requires you to see the big picture and work with a bigger time frame.

Get Started

Investing is a key part of staying financially fit. Do your research, choose your investments and, when you're ready, jump in. By taking charge and making your money work for you, you can make your financial future a bright one.

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