Where Investing in Stocks Fits into Your Financial Goals
Most long-term financial goals are almost impossible to accomplish without investing in stocks. Here's why (see table below):
If you save $100 and it earns 5 percent interest, at the end of the year, you might think that you have $105. However, it doesn't work out that way in real life.
If your combined state and federal tax bill is 20 percent, that has to come off your profit. If inflation is 3 percent, that has to come off the total because the value of the dollar has dropped that much.
See the table below for what actually happens.
Your $100 of savings earned you a whopping 85 cents of increased purchasing power after your money worked for a whole year. This is not a bad thing for the cash you need on hand for your short-term living needs and your emergency fund.
However, it is clear that this strategy is not going to build a nest egg that will provide for you in the future. On the other hand, if you put your savings into secure products, you can be reasonably sure of the return and you won't lose any of your principal.
It is difficult to reach significant financial goals such as retirement without taking some risk. However, you can manage that risk to a certain extent.
There is no magic to investing success. Anyone willing to take some a little time can learn the basics and stick with a plan that fits their needs and risk tolerance.
The important lesson is to find out where you are comfortable and not let well-meaning friends talk you into investments that are wrong for your situation.
One of the fundamental rules of investing states that you should understand what you are investing in. This does not mean you have to become a software genius to invest in Microsoft.
It does mean you should know what Microsoft does, what companies are its competitors, and how it is doing in the market. All this information is readily available for free - you just need to take some time to read it.
Some other rules of investing cover the timing of when you should buy and when you should sell. Most of the information you read or see in the media about investing is of little importance to the long-term investor, but you still need to know some basic information about how the markets work and what the leading market indexes tell you.
One of the best resources on the Internet for analysing individual stocks and mutual funds is Morningstar.com. If you are serious about investing in stocks, pay for the premium service. It is well worth the price.
The are no guarantees when investing in the stock market, but with some research and an understanding of how the markets work, it is possible to earn higher returns than savings without taking excessive risks.
The Problem with Savings
If you save $100 and it earns 5 percent interest, at the end of the year, you might think that you have $105. However, it doesn't work out that way in real life.
If your combined state and federal tax bill is 20 percent, that has to come off your profit. If inflation is 3 percent, that has to come off the total because the value of the dollar has dropped that much.
See the table below for what actually happens.
Your $100 of savings earned you a whopping 85 cents of increased purchasing power after your money worked for a whole year. This is not a bad thing for the cash you need on hand for your short-term living needs and your emergency fund.
However, it is clear that this strategy is not going to build a nest egg that will provide for you in the future. On the other hand, if you put your savings into secure products, you can be reasonably sure of the return and you won't lose any of your principal.
It is difficult to reach significant financial goals such as retirement without taking some risk. However, you can manage that risk to a certain extent.
Work Smarter
There is no magic to investing success. Anyone willing to take some a little time can learn the basics and stick with a plan that fits their needs and risk tolerance.
The important lesson is to find out where you are comfortable and not let well-meaning friends talk you into investments that are wrong for your situation.
One of the fundamental rules of investing states that you should understand what you are investing in. This does not mean you have to become a software genius to invest in Microsoft.
It does mean you should know what Microsoft does, what companies are its competitors, and how it is doing in the market. All this information is readily available for free - you just need to take some time to read it.
Some other rules of investing cover the timing of when you should buy and when you should sell. Most of the information you read or see in the media about investing is of little importance to the long-term investor, but you still need to know some basic information about how the markets work and what the leading market indexes tell you.
One of the best resources on the Internet for analysing individual stocks and mutual funds is Morningstar.com. If you are serious about investing in stocks, pay for the premium service. It is well worth the price.
The are no guarantees when investing in the stock market, but with some research and an understanding of how the markets work, it is possible to earn higher returns than savings without taking excessive risks.
The Problem with Savings
| Original deposit: | $100 |
| Interest earned | $5 |
| Sub-total: | $105 |
| Less taxes (20% - $5) | ($1) |
| Less inflation (3% - $105) | ($3.15) |
| Total return in real dollars: | $100.85 |
| Real rate of return: | 0.85% |
Source...