When you’re following your roadmap to achieve your financial goals, make sure that you don’t lose money along the way. From 1995 to 2005, consumer prices rose an average of nearly 3.5 percent every year. If you kept $1,000 in cash during those years, by 2005, assuming no interest, the buying power of that money would have declined to about $700.
By not investing the money, youwould have lost some of it. But if you put the $1,000 into investments, such as a mutual fund or stocks and bonds, you at least had a chance that the buying power of your money would be the same or higher—because the investment went up in value, or because you received dividends or interest on it, or both. So how should you invest the money you’re saving for your future? There are lots of choices:mutual funds, index funds, stocks and bonds are some of the options. In each category there are thousands of possibilities, but investing doesn’t have to be complicated if you follow these basic principles. If the price rises 6 percent again the next year, you’ll have $561.80 ($530 times 6 percent). If you choose your investments well and keep track of how they’re doing, this pattern can continueas long as you do not sell them. The other way to make money investing in stock is by receiving dividends. A dividend is a cash payment issued by the company—it may be issued monthly, quarterly or annually—as a way of sharing its profits with stockholders. Even if the price of the stock does not go up, you still make money on it.
Match Your Investments to Your Goals
You may be saving for yourchild’s college in five years, or for your retirement in 25 years. The appropriate investments for these goals are different. The time your money will have to grow has a lot to do with the type of investment that’s right for you. The longer you have until you’ll actually need to spend the money, the more risk you can take with your investment. Over many years, investing in stocks grows your moneymore than investing in bonds or leaving it in cash, such as a money market or savings account. But stock prices can go down as well as up. Let’s say you decide to retire in two months. You need to start selling some stocks to get
How long your money is invested can make a big difference in how much you end up with. Check out the two examples below: The 22-year-old invested lessmoney than the 40year-old. But she ended up with more because she started early. It’s based on the power of compounding. Your money goes up in value, and you continue to earn more on the higher amount, as the value increases. For example: if you invest $500 in a stock whose price goes up 6 percent in a year, it will be worth $530 after one year (6 percent times $500).
Years of Contributing
Value by Age 65
$500 a year $500 a year
retirement income. If the price of your stocks has gone down at that moment, this can be a big problem. So as you get closer to retirement or to needing the money for something else, you’ll probably be better off choosinglower-risk investments. Here’s how three basic investment categories— stocks, bonds, and cash—measure up on the risk scale: Investment Type Stocks What Historical returns it is (1925-2002) Ownership of 10.2% a piece (share) of a company A loan to a company 5.4% or a government Cash or the 3.8% equivalent (savings deposits, money market funds, etc.)
Invest in mutual funds—for example, a stockfund that invests in many different companies or in several different market areas; or Invest in index funds—for example, one made up of large companies and one made up of small companies.
Keep Fees Low
It costs money to invest. The fees and expenses you pay for investing will reduce your returns, so pay close attention to them. For example, you may be charged a sales commission when you...