Everyone in the world has to earn money at some stage of his/her life. They know in order to live, you need money. But earning alone would not be sufficient to meet your financial needs. You need to save a percentage of your income to survive during unexpected events in your life and most importantly to consume after the retirement.
However people do not place the same importance when it comes to saving. True you need to first earn and consume before you save. But earning money and spending it all without saving is ridiculous. That why they say “Anybody can earn money, it's the savings and investments that count”
On the other hand some people go to the extreme of saving. They deprive them from living a comfortable life and save each and every single penny they earn. This is also ridiculous. So if you already have the habit of saving and investing, please check whether the amount you set aside for long or short term investments does not affect your daily lifestyle or liquidity.
Let us now look at some of the ways and means by which you can invest the money you saved.
The 1st thing which strikes my mind when it comes to investing is the good old bank account. Banks offer you a set interest for the amount of money you deposit with them per month. The interest rate can vary around 2 percent in the US. The advantages of bank accounts are the safety and liquidity it provides. If you are a risk averse person or you may need the money back in a hurry this may the way to invest. However if you are in search of rewards never ever select bank accounts because the interest rates are very low.
Certificate of Deposit (CD) is another safe way to invest money. Here the banks offer a set interest for the amount of money you deposit for a specific time. Although the time span can vary from case to case, the general time frame is six months to two years. Further you can expect compound rate around 7 to 8 percent which is much higher than that of savings accounts.
Bonds are mainly offered by banks and companies. Similar to CDs, bonds also give around 7 percent interest annually. However the time span is 4 years which is longer than that of CDs. As such bonds should be invested in only when there is no immediate need of the money for a set period of time. The risk is generally low and therefore this falls under the category of safe methods of investment.
Probably the most rewarding alternative out of all the other investment methods is investing in stocks. Stocks are shares in companies which can be bought and sold by individuals or other companies at any time. Although there is an interest component within the total return (dividends), the main form of return for the investor is the capital gain which is a result of a favorable upward movement of the share price. For instance assume you bought 100 shares of Company A at $12 yesterday and you find the share price has suddenly risen to $15 today. What does this mean? It means you have earned $300 overnight. Wow! Isn’t that fantastic? But wait a minute, the share price could have gone to $9, then you would have lost $300 overnight.
I know you may be scared now. If you are not, you are the ideal person to invest in the stock market. The return is high on average 11-12 percent annually so as the risk. Although the market can go down and you end up losing a lot of money, the historical data shows that financial markets recover. So the longer you keep your money in the stock market the better it will grow to achieve your goal.
Having gone through all the alternatives discussed above, now you may be wondering what to select. Your selection depends on your risk appetite and how long you can keep the money invested. If you are risk averse and needs the money back in 1to 4 years, a bond or CD is the best option. But if you can take a good amount of risk and if you don't need the money for at least another five years then investing in stocks may be best suited to you.
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