Our social and educational systems have trained us to think that if we want money, we have to earn it. This means making the nine-to-five grind and waiting for payday so that you get rewarded for all your hard work. This way of earning money, however, means that you know how much you’re getting each month. If you want to earn more, you work overtime and/or find a part-time job. However, there are only 24 hours in a day and you can’t spend all those hours working. Besides, even if you actually amassed a lot of wealth working your butt off, it would not be fun not having the time to use all that money now, wouldn’t it? Clearly, there has to be a better way.
That better way is called investing. If you want to make more money without working more hours, you will need to invest. Investing is committing capital to something so that it will earn more money. We don’t have to explain why you want more money, right? Aside from allowing you to enjoy the conveniences of having money now, you will need it to fund that life-saving operation, send your children to college, and more importantly, secure your retirement. Investing is an essential component of sound retirement planning since the days of working in the same job, receiving lifetime pensions, and looking only to ten years of retirement are fast disappearing.
When you invest, you let your money work for you so that you don’t have to work longer hours yourself. By educating yourself on what investments are and what types of investment vehicles are available, you can take things easy and still rest in the knowledge that your money is growing.
A very important concept that you need to understand as far as investing is concerned is that of compounding. Compound interest is the process of getting earnings from previous earnings. To fully experience the power of compound interest, you will need to reinvest your earnings and give it time to grow. Any earnings made on the principal is not withdrawn but added to the principal amount so that it can earn more. Interest can be compounded weekly, monthly, or yearly.
Here’s an example: Let’s say you invested $10,000 in an account that will earn 5 percent interest in a year. If that interest is compounded monthly and you don’t touch it for five years, you would have close to $13,000 by the fifth year. And all that without working all the extra hours!
The concept of compound interest makes investing very tempting, indeed. But before you can actually dip your hands into investing and reap the benefits offered by compound interest, you need to educate yourself about the different ways by which you can invest your money. Of course, you might want to hire a money manager down the line but this does not mean that you should not learn about investing yourself. When you know what you are getting into, you are more likely to have control over your money and your investments.