Thinking Ahead: Investing

Many of us have been taught to save our money from a young age. We are told to put it away for the unexpected and costly incidents life throws at us, or for the foreseeable future ventures, like college that we hope to pursue. However, did you know that there is a way to grow your savings without having to work for it? The process is called investing, and while there are many ways to invest, some far more complicated than others, I will share a few of the basic investing techniques my father taught me.

First, let’s explore investing a little further. According to Investopedia.com, investing is the process of “putting your money to work for you.” When you put your money (i.e. invest it) towards something with the expectation of making a profit in return, this is investing.  There are many things a person can invest in such as a company, real estate, a project, a car, or the stock market, etc.

Unlike a job, investing does not require your physical presence and labor to produce profits. All that is required is some research to make sure your investments are secure. In other words, it’s like making any other purchase. Let’s say I want to buy an HD TV that will last me for 10 years. I will have to do research to find out which TVs are the most durable, while still providing the quality I desire. It’s the same with investing. You should research a potential investment to make sure that its prospects are good. Without doing research, I may buy a TV that doesn’t deliver the HD quality I seek, or the 10 year longevity I hope for, which would make it a bad investment for me. Research, research, research!

IMPORTANT TO REMEMBER.
Investing is a way to earn money, however, the income made by investing is not a substitute for a job but a supplement. Despite the research involved, no investment is a guarantee. There is always a risk that comes with investing, but the more research you do, the more certainty you have that something with produce a positive outcome. For instance, the TV I ultimately choose to buy has a 95% approval rating, an exceptionally good rate with much promise. However, it leaves a 5% margin of error in which my TV has the potential to fail, and I have to keep this in mind as I invest money into this new TV.

As the expression goes, “don’t put all of your eggs in one basket.” When investing, you don’t want to put all of you money in one place. This reason is simple: because there is risk involved in every investment, it is possible that you will lose the money you have invested. The solution is to diversify. Put a little of your money into one thing, a little into another, etc. and always make sure to have enough savings on hand.

There are many ways to invest your money. I will list two simple ways below.

Certificate of Deposit (CD)
Putting your money in a Certificate of Deposit is a way to earn interest greater than that of a traditional savings account. A CD functions much in the same way as a savings account, however, it comes with restrictions that a traditional savings account does not, because it is not an account where you can make transactions (withdrawals, transfers, etc). For example, you must agree to put your money in a CD for a set period of time. During this time you may not withdraw your money, or you will incur a penalty. Also important, the interest rate on a CD remains set, regardless of the market changes throughout the year. Typical time periods for a CD are anywhere between 1 month to 5 years. To illustrate how a CD works, let’s use this example from Investopedia.com:
Let’s say you purchase a $1,000 dollar, year-long CD with an interest rate of 5%. At the end of the year you will have earned ($1,000 x 1.05) $50 for a total of $1,050. This may not seems like much, but here is the trick to investing, though you could withdraw the $50, you may also choose to reinvest it. This process of reinvestment is called compounding and will help your money grow even more. Now, you reinvest the $1,050 in another CD at a 5% interest rate. At the end of the year you will have earned ($1,050 x 1.05) or $52.5 for a total of $1,102.5.

Money Market

A money market functions essentially the same way as a certificate of deposit. However, different restrictions apply. With a money market, the rules are much more flexible. Unlike a CD, a money market allows you to withdraw money at any time, but only so many times in a set period. For instance, your bank may only allow you to withdraw money 6 times in 3 months. Additionally, you may withdraw as much money as you want, but you have to maintain a minimum balance at all times. Just say you put $1,000 into a money market, but your bank requires a minimum balance of $100. You may withdraw as much money as you want and up to 6 times in 3 months, but you cannot let your money market balance go below the $100 limit. Though the interest rate in a money market is greater than a traditional savings account, unlike a CD the rate is not set. For instance, if the market takes an upturn or a downturn, the interest rate may fluctuate to accommodate the market changes. With a money market, time commitments are also more flexible, allowing you to determine their longevity. The same rules apply in terms of earning interest, but remember that if you withdraw certain amounts of money, your interest earnings will be lower, and also more difficult to calculate, just as the changing interest rate makes determining your earnings difficult.
These are only two, of many different ways to invest your money. If you’re interested in learning more ways to manage and grow your money, consider doing more research, or taking a class. Talk to your parents and a banker about opening a CD or Money Market account. Happy saving!
GLOSSARY

Investing: To put (money) to use… in something offering potential profitable returns

Profit: Gain (In this case monetary) derived from a successful investment

Prospects: An apparent probability, future outlook

Supplement: An addition made to reinforce, or complete something

Interest: A sum paid or charged for the use of money or for borrowing money, usually expressed as a percentage of money to be paid over a given period.

Transaction: a negotiation carried out to its conclusion (Ex: the withdrawal, deposit, or transfer of money)

Compound Interest: Interest earned and calculated based on the previous interest gained.

Definitions provided by Dictionary.com

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