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Introduction

Would you like to be able to purchase a house in a few years? Travel around the world? Retire before you are 90? Unless you won the lottery, chances are that you will need to save and invest to obtain many of the things you want. This module covers what you need to know to get started:

  • The Power of Investing
  • Establish a Healthy Foundation
  • Investment Classes
  • Risk Management
  • Research and Purchasing

 

Chapter 1: The Power of Investing

Investing is the act of putting your money in a financial vehicle with the goal of making a profit. Basically, you are making your money work for you. Successful investing requires both a commitment to regularly setting aside money and choosing appropriate investment options based on your goals. Many people fall into the trap of playing it too safe, parking all of their savings in a savings account. Savings accounts and other zero risk options are a great choice for an emergency fund and short-term goals. However, they are not the best choice for goals with a longer timeframe. That is because the return they provide is extremely low, usually less than the rate of inflation (the general rise in the cost of goods and services over time). If the return is less than the rate of inflation, that essentially means you are losing money over time.

With stocks and bonds, the risk of losing some or all of your investment is higher but generally, so is your return. The higher your return, the less you have to invest each month to hit your goal. Compound interest (interest earned on interest) can help your earnings to increase significantly, especially when the return is high. The chart below shows the interest earned on an investment of $2,000 a year with a return of 1% and 5%.

Years Invested
Total Interest Earned (1%)
Total Interest Earned (5%)
3
$60
$305
6
$304
$1,604
9
$737
$4,053
12
$1,365
$7,834


Investing Is Not Gambling
When you invest, it is important to keep in mind that you are taking on some risk. However, there is a difference between investing and gambling. Gambling is making a bet on an outcome that is largely or completely determined by luck and hoping you will get a big payoff in a short period of time. Investing is committing money for the long-term in order to gain a reasonable financial return. A wise investor does research and makes risk-managed decisions instead of relying on luck.


Start Now!

It is easy to say you will start investing tomorrow, but procrastination will cost you. The earlier you begin to set money aside, the longer your savings has time to grow. If you started investing $200 per month in a vehicle earning an average of 5% a year, in 20 years, you would have $79,358 ($48,000 in contributions and $31,358 in interest earned). If you waited five years to start, you would have $51,789 ($36,000 in contributions and $15,789 in interest earned).

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