The 8th Wonder of the World You Need to Know About
Why should you be investing today? Some people are steering away from investing during this pandemic, what with the foreboding headlines and uncertain future. However, investing remains an important way to accumulate wealth in this economic climate.
Saving vs. Trading vs. Investing
Many people confuse the terms saving, trading, and investing. What’s the difference?
Saving is when you put away money securely in a savings account, checking account, certificate of deposit (CD), or money market. Savings typically have easy access, a relatively low and stable interest rate, and an FDIC guarantee. We recommend maintaining emergency savings account with enough funds to get by for six to 12 months. For many people, this is anywhere between $25,000 and $50,000.
Trading is when you buy and sell stocks, bonds, or other financial products. You can make a quick buck, but there’s no opportunity for long-term growth and stability.
Investing is about financial growth over time. Whether you invest in your own business or purchase a share in a Fortune 500 company, you essentially own a slice of that operation. This proposition comes with more risk, but it also has a higher potential for return.
Once you have adequate savings in place, we recommend investing to help you accumulate wealth and prepare for retirement. Ideally, you should work toward having eight to 10 times more money in investments than you do in savings.
Think of investing as a garden. If you plant a tomato seed today, you won’t have a tomato plant tomorrow. There is no instant gratification the way there is in trading. It takes time, patience, and regular attention to build a successful investment portfolio, but if you’re consistent, the results can be amazing.
Investing requires an understanding of opportunity cost as well. This economic concept states that there’s an infinite number of ways you can spend every dollar you earn. Once you decide how to spend it, you can’t spend it any other way. Therefore, you need to earn another dollar to buy the next thing on your list. Thinking about the opportunity cost of every dollar you spend can help guide your investments.
What Makes Investing So Powerful?
Far too many people focus more heavily on saving than investing, but this is a mistake. Why is investing so important?
- Investing offers healthy returns. The historical average gain of long-term investments is 8 to 10 percent compared to 1 or 2 percent for savings.
- Compound interest can build incredible wealth. Dubbed the Eighth Wonder of the World, compound interest means your investment grows each year—not just on the original amount, but on the original amount plus the growth it made that year.
- Investing provides multiple aspects of growth. Dividends, interest, and capital gains are all possible ways to make money from investments.
Successful investing often requires help from a financial planner. Reach out to Nelson Financial Planning at 407-629-6477 or schedule your free initial consultation online to start putting your money to work for you!