When it comes to financial issues, more is often too much. By this, I mean that there is simply too much information to get bombarded by. How do you know what is right and wrong? Well, sticking to the fundamentals is a good way to go.
Your choices when it comes to investing are staggering. For the conservative, there are government bonds. For the super aggressive, there are commodities. For most, mutual funds and stocks make a perfect solution.
After a while, it can be easy to wonder not only who is correct, but what you should do with your personal financial situation. Ultimately, the answer is you can make money in nearly every area of finance, but only if you follow some basic rules.
The single most basic rule you must understand has to do with time. No, I am not talking about timing the market. Instead, I am referring to the power of time. Nobody will talk about this on financial shows, but it is a critical concept.
Time is powerful because the more of it you have, the more your money can work for you. As the years pass, you can incorporate gains into your portfolio and have them make money for you as well.
A good example of this is the rule of seven. It works like this. If you get a seven percent annual return, your investment will double in 10 years. This would appear to make no sense, but it does because your gains are being reinvested.
While this is a very simple scenario, it is a fundamental rule followed by everyone. It also shows the power of time because it is a simple example of how reinvesting your gain makes you a ton of money in the long run.
Generalities are great and all, but what about real examples. Okay, assume you invest two grand each year in an individual retirement account for thirty years. With a 6.9 annual return, you end up with $185,000. Not bad, eh?
Now, what if you start saving when you are 45, but put in $4,000 a year and get a 6.9 percent return? Your total at the end of 15 years will be $99,000. Your total return is much small despite an interesting fact.
In both of these scenarios, you contributed the same amount of money. With the same $60,000 contribution, you ended up with entirely different amounts. Why? The power of time. The longer investment period returned the better final numbers.
You do not have to be a wizard to invest comfortably. The key is to start as early as possible. This is true even if you are just putting $100 a month towards it. As time passes, that money will grow and grow and so will your nest egg.
About the Author:
Barry Waxler is an expert in small business succession planning and offers free consultations.
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