It is pretty easy to reach small financial goals even if you are not very disciplined with your finances. But it becomes more problematic when it comes to more significant purposes like purchasing a house, accumulating retirement capital, or collecting money for a child’s education. And one of the best decisions is to start your investment journey. Even though it is challenging, the right investment strategy can increase your chances of accumulating the desired amount of money by several times, compared to other savings methods. So, here are six tips that can help you understand how long-term investing works.
Determine your goals clearly
This quote from Alice in Wonderland may show the importance of setting precise goals:
“Would you tell me, please, which way I ought to go from here?”
“That depends a good deal on where you want to get to,” said the Cat.
“I don’t much care where—” said Alice.
“Then it doesn’t matter which way you go,” said the Cat.
“—so long as I get somewhere,” Alice added as an explanation.
“Oh, you’re sure to do that,” said the Cat, “if you only walk long enough.”
It means that your goals determine your path to them. And if you do not know where you want to get, you may find yourself anywhere except for the right place.
Some may argue that there is no difference between saving up for retirement or a house, as you need a significant amount of money in both cases. There are, however, many differences.
First, when your goal is to buy a house, you can stop collecting money after purchase. So, you need a fixed sum — for example, $1 000 000. And, for sure, you need this money as soon as possible.
In the case of retirement capital, you may estimate that you will need, for instance, $50 000 per year. Yet you could not say for how long. Do you want to retire in your forties or fifties? And how long will you live after that? Ten years? Twenty? Thirty or even more? What if you have a destructive disease and spend all your savings? What if your house burns down? Do your children ask you about financial help? That means that it is not a completable goal. You will need to continue to grow wealth all the time.
The conclusion is to think your goals through before you start investing. Only after that, you will be able to choose the right investment tools. Also, it helps to keep motivated and reach your objectives.
Start investing right now
We do not mean you must headlong run and invest in whatever you find first. What we want to say is that it is never too early to start increasing your capital. If you are only twenty years old, you may think you have plenty of time to collect money for any goal.
But here is some math to consider. Let us say your annual salary is going to be $20 000 for the next three years. Then, you will get $30 000 per year for the next three years and $40 000 for three years after that.
If you do not start investing until you turn thirty, you will only get $270 000 in expenses and some not very valuable stuff. If you, however, just save up 10% of your income or put it in a bank, you will have a little more than $27 000 at best. But considering inflation, that will not be the equivalent to when you have started your savings. It is better than doing nothing but also too little for long-term goals. You are not even close to your own house or early retirement.
However, if you invest your money correctly with compounding, you will get much more.
- Monthly salary year 1-3: $1 667
10% investment per month: $167
The total amount in 1-3 years (annualized returns of 10%, before taxes): $7 519
- Monthly salary year 4-6: $2 500
10% investing per month: $250
The total amount 4-6 years (annualized returns of 10%, before taxes, based on 1-3 years of income): $ 20 930,79
- Monthly salary year 7-9: $3 333
10% investing per month: $333
The total amount 7-9 years (annualized returns of 10%, before taxes, based on 1-3- and 4-6-years income): $ 42 408.
In this example, we took a 3-year period for savings in each part but summarized savings for initial investment for every step. And in the end, you have 57% more than if you just put money under the pillow. Also, if you start investing in your thirties and not twenties, you will end up losing about $42 408.
Choose the tools that do not allow you to take money back
Some investment tools prohibit you from withdrawing money before the designated term. It may be a year or five years or even before you reach some age.
It is constructive for long-time goals because you are less likely to spend your savings because of financial troubles or just in a moment of insanity.
Invest in stocks
From the first look, equity investment may seem too risky for the long term. But there is a subtlety.
You decrease your risks when you get an elaborate portfolio based on statistics and data analysis with reliable companies. Do not look at the short-term graphics, they may fall and recover every day depending on plenty of factors. If you choose the right equities, you will get your income anyway. And possibly dozens of times more than you have expected.
Rely only on data and logic for your investment decisions
When it comes to investment, you should never act impulsively. Do not run and sell your stocks only because some people on Internet say they will fall. Or because the company has some temporary troubles.
First, analyze the situation. Speak with different financial experts. Try to see the whole picture. Use logic, not emotions. Market noise can be thunderous, but do not sink into it.
Diversify your portfolio
Placing your money in one company or industry is a great temptation. It is easier and demands fewer efforts to study where you will invest. But it raises risks on a high level. If you do not ready to lose all because of somebody’s mistake, better invest in different companies and branches.
Conclusion
Once you set goals and choose where to invest, do not forget about this part of your life and just put money in the account. Long-time investing is a long road, and you need to check where you are periodically to make sure you move in the right direction.
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