Investing is about putting your money to work. If you do it wisely, you have the potential to increase your principal, or the amount you’ve invested, over time. The money your investments produce can mean the difference between meeting your financial goals and settling for what you can afford.
But investing isn’t the same as saving. When you save, you’re putting money in a safe place to earn interest—a bank account, for example. That’s fine for building an emergency fund or accumulating money for short-term goals. But your principal won’t grow much faster than the rate of inflation, or the gradual increase in the prices of goods and services. That can leave you short on buying power. While there are always risks with investing, there is the expectation that over time you’ll beat inflation by a wide enough margin to achieve your financial goals. But nevertheless, you could lose all your money, so be advised you need to develop a financial profile that includes a risk tolerance test. Know thyself. “To Thine Own Self Be True.”
If investing seems like an alien experience, try an experiment. Buy an index fund that tracks a broad segment of the stock market or a highly rated stock mutual fund that’s investing for growth. Promise yourself that whatever happens for the next year or two, you won’t sell the fund and you won’t stop investing in it regularly. If that’s not in your constitution, you shouldn’t be in the market.
There’s no hard and fast rule about how much you should be investing, but it’s smart to try aiming for 10% of your gross income. If you’re contributing to a retirement savings plan at work, you can count the percentage you’re putting in there as part of your total. And whenever you get a bonus, a gift, or other unexpected cash infusion, consider putting some or all of it into your investment account as well. It could make a difference later on.
As you become closer to your retirement, you may become risk adverse. So you may want to start repositioning your portfolio to a more conservative posture.
Contributions from the book It’s Your Financial Life in this press release are used with permission from Light Bulb Press.