Ways to Invest
There are many different ways to go about investing. With so many options, you could essentially choose the one which works best for you and makes you the return you are happy with based on your comfort with risk. You might like a really high return rate, but if you aren't also willing to lose that money then you might be happier with something safer. A few common types of investments include:
- Stocks
- Mutual Funds
- Real Estate
- Business Ventures
Plus, you don't need to be a rocket scientist to do it. All that you need is some basic knowledge so that you can get started. With that being said, let's take a look at some misconceptions about what investing is.
What Investing "Isn't"
To put simply, investing isn't gambling. Gambling is when you put your money at risk without being reliably certain of the outcome. You're essentially "hoping" to make money with a gamble. Investing is completely different. When you invest your money, you are using your critical thinking skills to weigh the pros and cons of your investment and then determine whether or not it is a safe bet. By doing some smart thinking, you are making your chances of growing your money go up considerably.
What is Compounding?
"Compounding Interest" is a concept that Albert Einstein considered to be the greatest discovery in mathematics of all time. And most investors would agree with this statement. As you are about to see, compounding is very powerful. It can turn a small amount of money into a larger amount of money in a relatively small amount of time. It essentially allows your money to work for itself.
For compounding to really work, you'll need two things: time and the re-investment of earnings. The more time you allow your investments to grow, the more and more money you're going to make. And the process is going to quickly accelerate the longer you keep your money in any particular investment.
The Compounding Example
To demonstrate the power behind compounding interest, let's take a moment to go over a simple example: let's pretend that you have $10,000 and you're earning 6% per year in interest. At the end of the year, you'll have $10,600. Okay, simple enough. Now, let's compound that amount and see what you would have after another year at 6% interest: $11,236.00. In two years, you managed to grow your investment by $1,200 by simply allowing it to sit there.
This wouldn't have happened if you wouldn't have re-invested the $600 that you had earned in the first year. For compounding to truly work, you need to re-invest your earnings with the original investment. While the process may start slow at first, it can quickly grow into a wildfire. After a few to several years, the compounding interest earned on a particular investment can become massive.
Making $600 on 10,000 sounds good, but when you let it sit in there and really multiply by several years it get's going really fast. At 6% your money would double about every 12 years, but at 8% it would double every 9. This is why people are so interested in the rate of return.