If you dream of becoming financially independent one day, your chances go up exponentially the younger you start, but you can still make gains even if you’re older, it’s all about knowing where to start and getting started.
Whether you’re a teen just starting to enter the workforce or someone who is nearing retirement, it’s never too early or too late to think about, plan and take action toward your financial future. It’s not even premature if you’re not earning any money yet or handling a lot of money. Learning what to do is half the challenge.
Here are the 4 core areas you can invest your money in. As you will see, they vary from low risk/low return to high risk/high return.
The objective of investing is to make the highest returns at the lowest risk.
Another factor is the age of the investor. Younger investors will be working for a longer time, and therefore, have the luxury of giving investments more time to accrue income. Also, they have a little more leeway at taking on higher-risk investments because they can have more working years to recover lost money if an investment goes bad.
Older investors have a twofold problem: Firstly, they have a shorter time to make returns on their investments. Secondly, they have fewer working years to recover money from a bad investment. Therefore, lower-risk investments may make more sense.
Overall, those who have more money are in a position to have extra money to make investments without impacting the money they need to live on. It is unwise to gamble money you need for monthly expenses or even your future when money is tight.
For that reason, you should always consider…
The rule of 72 works like this:
Take the number 72 and divide it by the return you expect with the investment. The quotient will give you the number of years it will take you to double your money.
For example, let’s say there’s a high-risk investment you expect to bring you 10% ROI (return on investment) annually.
72 divided by 10% = 7.2 years.
Now compare that to a savings account that pays you 2% per year. It will take 36 years to double your money.
If you are young, and only have a tiny bit of money to invest each year, that safe investment might make sense over time.
At the same time, if you are older, and are 10 years from retirement – and can risk the investment without damaging your retirement – the higher risk investment that will double your money in 7 years may work for you.
The bottom line is you always must weigh risk vs. return vs time. Investments aren’t guaranteed, there is always a risk and it can be a bit of a gamble. However, at the same time, there are measured risks. Everyone’s financial situation is different. The answer lies in finding the amount of risk you can take based on your available cash flow and one that doesn’t set you up for financial ruin.