Do you think you are ready to start investing?
Investing is a great way to build wealth for your future, and is a key component to reaching financial freedom. But before you get started, make sure you understand these three important things!
Watch the video above and get ready to invest!
One of the most common things I hear when people are apprehensive about investing is...
"Why don't I just keep that money in my savings account?"
Savings accounts are not known for paying high interest rates. This means most of the time your money is just sat there, not growing.
When we consider that the average annual inflation over the last 20 years is 3.10%, any savings account that is paying less than that is eroding your purchasing power.
To understand the extent of that, check out my inflation calculator.
Investing your money is not only a way to protect it from inflation, it's a way to see higher returns for your expensive goals.
Retiring is one of the most expensive goals there is, and many assume that it is a time in life that is given to everyone. In reality, retirement is a financial milestone and investing is a key component to reaching it.
The next thing to understand about investing is knowing how your investments grow.
Seeing numbers grow on a compounding calculator is an amazing thing. Seeing them grow in your account is even better. But a lot of new investors are left wondering... okay, but HOW?!
When you're investing, you are putting your money in companies, or groups of companies. Your cash is traded for shares of ownership. As the company grows and becomes more valuable, their share price will increase. That means the share(s) you own increase in value too!
Growth will vary depending on what you're investing in, but we can look at historical returns to get an idea. Understand that past performance DOES NOT guarantee future results! The stock market can be risky, and you should be prepared to see your investments drop in value from time to time.
I do most of my investing in Vanguard's Total U.S Stock Market ETF, which goes under the symbol VTI.
VTI's average annual return since it's inception is 8%, and much higher for recent years. I use 8% for my retirement projections, since the majority of my account is in this fund.
The final consideration before you start investing is...
Make sure you're financially ready to invest.
There are some people that think you need to be 100% debt-free before you start investing. While I'm not one of those people, I do believe you need to hit a few financial milestones achieved before you put your money in the market.
Having a sufficient emergency fund before you start investing is crucial. The money you invest is not considered liquid, because it is not easily accessible. If you were to need this money for an emergency, taking it out would take a few days.
You also want to leave your investments left alone to grow for as long as possible! Time is one of the most important ingredients in your investment accounts. The money you invest should not be money that you need in the immediate future.
You should also have a handle on your debt situation, if you have any. High interest credit card debt will eat your net-worth faster than your investments will grow it, so eliminating that should be a priority before you invest!
If you have low-interest debt like student loans or a mortgage that you can comfortably manage, you should be fine starting your investing journey! Time is crucial, so waiting until all your debt is paid off could be a bigger financial risk than you think.
If you want a free copy of my 'Before-You-Invest Checklist' you can get one below!
Hi, I'm Alicia, welcome to Friend of Finance! This site is a way for me to share helpful things I've learned from working in the financial industry, important money things that I probably wouldn't have learned otherwise, and things everyone should know about.