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If
you’re waiting for the appropriate time to start investing in your
future, there’s no time like the present. The earlier you invest, the
more opportunity you give your money to grow. Your money should be
working for you at all times. Understanding the rate of return that
your accounts are yielding is key to gaining financial independence.
The most common method that the financially savvy use is the Rule of
72.
The Rule of 72 estimates the time it will take for your money to double
in an investment by using your rate of return.
For example: Traditionally, people are taught when you get a job, you
open a checking and a savings account. The checking account is for your
daily expenses and the savings is the investment in your future. The
average savings account yields around 1 percent interest.
According to the rule of 72: If you have $1,000 in a savings account
that yields 2 percent interest, it will take your money 36 years to
double (72 / 2 percent interest = 36). Clearly, a savings account is
not the proper vehicle to use in building wealth.
The next step up on the investment chart would be a CD. A CD
(certificate of deposit) is a risk-free savings account insured by the
FDIC where the depositor must leave money in the account for a fixed
term (usually 3 months, 6 months, or 1 to 5 years) until maturity is
reached. The average CD boasts a 4 percent return. A quick calculation
reveals that at that percentage rate, it would take your investment 18
years to double in value (72 / 4 percent interest = 18). While better
than a savings account, a CD still isn’t the fastest way to grow your
savings.
If you’re serious about investing for the longer term, mutual funds
have historically been one of the best vehicles for most investors. A
mutual fund pools money from many investors to invest in stocks, bonds,
short-term money market instruments and securities. A professional
portfolio manager manages the account, and though there can be bad
times to access your money (during down periods in the stock market),
your money is always available to you by liquidating some or all of
your shares in the funds. Your investments in mutual funds can boost
returns from the safe 1 percent up to a riskier 15-20 percent. The key
is to average your investments at a healthy 12 percent (72 / 12 percent
interest = 6), this will allow you to double your money every 6 years.
When investing, it’s not about how much you initially invest, as much
as where you invest and how consistently. Educate yourself on which
vehicles will help you achieve your financial goals. -adam jones
