April 6, 2015
It is the person who combines great saving habits with informed investment application that builds wealth over time Why? How?
It is the person who combines great saving habits with informed investment application that builds wealth over time Why? How?
If you want to be a great invester you need to have money to invest. It does not mean much if you can average 10% a year on your investments if you are not investing very much money. A 10% return is great but doesnt do much if its only on $100. You need to also save a good amount of money and put it in to your investments. A good goal is to save 20% of your take home pay. If you are a good saver but not an investor your money will get eaten away by inflation before you ever get to use it. So you need to put both of these together to get a good return on your money.
Passive income via compounding interest. Savings are important because you have to save money to have money to invest. If it’s invested poorly or not at all you will receive little return. For example checking and savings accounts return < (less than) 1% while generally stocks, bonds, REITs and other investments return between 4%-10%+ Over multiple years this interest compounds following the rule of 72. 72/ % interest received per year = number of years to double your money. Ex 72/10 = 7.2 years to double your money. If you received 10% interest per a year it will take 7.2 years for $100 to turn into $200 with no work from you! Apply this to thousands or hundreds of thousands of dollars and eventually you will not HAVE to work but you will be able to fulfill your dreams.
In able to build wealth over time, you need to firstly be able to save some of your money and then also know the best way to invest it for yourself. It won’t do you much good to make smart investment choices if you can’t first save a good portion of your money to do it with. Depending on your financial position in life, you need to decide the appropriate percentage of your paycheck that you will save each month so that you are paying yourself first. Once you have that amount figured out, then you can decide the best ways for you to invest it.
Many fine answers. Let’s recap.
(1) A great saver who does not invest (take risk with those savings) will have no trouble because inflation will eat up their money in the bank. Shrinking money is not good!
(2) A great investor (own markets all over the world at the lowest possible cost using no-index funds and/or ETFs and then hold for long periods of time with an occasional rebalance of the funds) will accomplish little if they do not save money consistently over time.
(3) Combining these two attributes can make you rich! Pay yourself first month after month (make it at least 10% of your gross pay and work at making it 20%). Send that money into your investments (avoiding the helpers along the way), and ride out the storms (bear markets). Financial freedom can follow!