Balancing the demands of starting a career with the realities of managing student loan payments, rent and all the other financial matters that go hand-in-hand with adulthood is no easy feat. If you’re crushing the day-to-day – and even if you’re still working toward it – don’t neglect one more important task: investing.
You don’t need to be a stock analyst or a financial whiz to invest, so take a deep breath and hear us out. If you’re just starting out, you hold one of the most valuable keys to investing: time. Whether choosing to participate in a workplace retirement plan, an individual retirement account or another investment vehicle for another purpose altogether, starting now offers the best chance for growing wealth for the future.
Capitalize on compounding
Although time can introduce some uncertainty, it can also be your greatest ally in growing the assets you have. It’s called the power of compounding, and it refers to the snowball effect on money invested wisely.
When you make an investment, you earn a return on the initial amount or principal. If you invested $1,000 now and earned 5% on that money in the first year for a total of $1,050, the next year’s earnings would accrue on the principal and all gains, so you would earn five percent of $1050, for a total value of $1102.50 after two years.
The more time you have, the more your earnings can grow. And, some investments have potential to generate higher rates of returns than others. The S&P 500 Index, for instance, has generated an average annual return of about 10 percent from inception through 2017 (though not without its ups and downs, sometimes for extended periods). Try plugging some numbers into a compound interest calculator to get an idea of your expected returns.
Clearly, the more you can save now and the more time you can let investments work for you, the greater the possibility of achieving a financially awesome position in the future.
Preserve your purchasing power
When considering the potential dollars awaiting down the road, such as in retirement, it’s important to remember that the amount may not buy as much then as it can now.
Inflation erodes purchasing power over time. The cost of goods and services tends to grow over time — hovering around three percent annually on average — so each year, your dollar doesn’t stretch quite as far as in the previous year.
When making investments, consider options that offer a return potential that can exceed the rate of inflation. By seeking out such options, you can improve your chances of preserving your purchasing power and living the life you had imagined for the golden years.
Seek out assistance
The thought of investing may seem overwhelming, but it doesn’t need to be. If your workplace offers a retirement plan, your benefits administrator is a great place to start for investing basics. Or, talk to a trusted financial representative to learn what your options might be. The key: start investing now to make the most of the time available.