You may think of investing as something only old, rich people do, but it's not. That's why it's so important to start investing at the beginning of your career, rather than waiting until you're older. The longer you have to invest, the more time you have to take advantage of the power of compound interest. Consider the number of years you expect will elapse before you tap into your investments. The last factor to consider is your investment time frame. Undersaving often leads to a future that's financially insecure. That, my friend, would lead to undersaving. Sure, you could count on a 10% rate of return if you want to feel great about your future financial security, but you likely won't be getting an accurate picture of your investing potential. It's always better to use a conservative estimated rate of return so you don't under-save. Those investments have varying rates of return, and experience ups and downs over time. When we figure rates of return for our calculators, we're assuming you'll have an asset allocation that includes some stocks, some bonds and some cash. This may seem low to you if you've read that the stock market averages much higher returns over the course of decades. So how do you know what rate of return you'll earn? Well, the SmartAsset investment calculator default is 4%. When you've decided on your starting balance, contribution amount and contribution frequency, your putting your money in the hands of the market. Rate of Return Photo credit: © iStock/Farknot_Architect A lot of us, though, only manage to contribute to our investments once a year. Depending on your pay schedule, that could mean monthly or biweekly contributions (if you get paid every other week). Some people have their investments automatically deducted from their income. You can also choose how frequently you want to contribute. The amount you regularly add to your investments is called your contribution. Casual savers may decide on a lower amount to contribute. Extreme savers may want to make drastic cutbacks in their budgets so they can contribute as much as possible. Once you've invested that initial sum, you'll likely want to keep adding to it. You can buy individual equities and bonds with less than that, though. Most brokerage firms that offer mutual funds and index funds require a starting balance of $1,000. Your principal, or starting balance, is your jumping-off point for the purposes of investing. That sum could become your investing principal. Say you have some money you've already saved up, you just got a bonus from work or you received money as a gift or inheritance. Finding the asset allocation balance that's right for you will depend on your age and your risk tolerance. The safe-and-sound investments sometimes barely beat inflation, if they do at all. The investments with higher potential for return also have higher potential for risk. In investing, there's generally a trade-off between risk and return. So what's an in investor to do? Conventional wisdom says older investors who are getting closer to retirement should reduce their exposure to risk by shifting some of their investments from stocks to bonds. The closer you are to retirement, the more vulnerable you are to dips in your investment portfolio. Risk and Returns Photo credit: © iStock/HAKINMHAN The average investor who doesn't have a lot of time to devote to financial management can probably get away with a few low-fee index funds. In fact, research shows this approach is unlikely to earn you consistent returns. You don't necessarily have to research individual companies and buy and sell stocks on your own to become an investor. With time, compound interest takes modest savings and turns them into serious nest eggs - so long as you avoid some investing mistakes.
Money you invest in stocks and bonds can help companies or governments grow, and in the meantime it will earn you compound interest. Investing lets you take money you're not spending and put it to work for you.
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To find a financial advisor near you, try our free online matching tool. Ready to put your money to work?Ī financial advisor can help you manage your investment portfolio. We'll walk you through the basics of investing, tell you about different risks and considerations and then turn you loose. It can show you how your initial investment, frequency of contributions and risk tolerance can all affect how your money grows.
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Whether you're considering getting started with investing or you're already a seasoned investor, an investment calculator can help you figure out how to meet your goals. Investment Calculator Photo credit: © iStock/samxmeg
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