Adulting 101: Grow Your Wealth OR Start Your Million Dollar Plan
A previous post introduced you to what should be a fundamental piece of your life – saving money. This post will teach you not only how to save, but to utilize these savings to work for you and grow year-to-year. A fun fact that will hopefully draw you in to pursue your own investment endeavors is that by investing only $5 a day starting in high school, you could have over one million dollars earned by retirement!
What is investing?
Investing is placing money into an account or purchase in such a way that it can grow over time. You could invest into something simple like a savings account or something more complicated like real estate. However, there are alternative ways to invest that are actually not as extreme as a large-scale purchase like a home and these can grow every year. A key concept to grasp when talking about investing are the two types of interest.
What is Interest?
Interest is the growth your investment will see over a certain period of time, usually represented by a percent (%) value. For example, a savings account is a common investment strategy. You place money into a savings account that grows at a rate somewhere around 1% or less per year (most savings accounts today are actually less than 1% growth). So, if you put $1,000 into a savings account at a 1% growth rate per year, next year your account will have grown to $1,010 if you do not touch it. This is where the type of interest becomes critical. Simple Interest means that you gain interest on your initial investment. In other words, if your bank account is based on simple interest (using our same example), it will grow by $10 every year if you do not touch the money in the account. Compound Interest means that you gain interest on both the initial investment and the growth! This is the interest that you want. Using our same example, if your bank uses compound interest, you will still get the same $10 on year one. But the following year, you will get 1% growth on $1,010 instead of the original $1000, so in the second year you will actually earn $10.10 for a total of $1,010.10. You might say “Wow, I could save a WHOLE ten cents extra a year, what a difference?” (trust me it gets better), but we can explore how this exponentially grows with alternative financial investments that have higher rates, as well as exploring the fact that you can invest more than a simple $1,000 over the course of your life!
What are some alternative financial investment strategies?
You may have heard of a very common alternative strategy to grow your wealth – an IRA, or Individual Retirement Account. Retirement may seem like a long time away, but it is a very real part of your life you have to deal with so you want to be set up to have the finances to support yourself. There are two types of IRAs, a Roth IRA (rIRA) or traditional IRA (tIRA). A Roth IRA means that you pay taxes on your investment up front so that you do not have to pay taxes when you withdraw your money at retirement (age 59 and ½). A Traditional IRA means that you pay the taxes at the end when you withdraw the money. These are the most basic differences between the two and they both have their purposes, so if you want to learn more you should seek out financial advice on which is best for your personal circumstances!
Another alternative strategy, which can be more active and not based around retirement is the stock market. The stock market is essentially a place where you can buy shares, or part-ownership, in a publicly owned business. For example, you could own a share in Apple or Tesla (wouldn’t it be cool to brag to your friends about that?). Today, a share in Apple is in the $300-400 range. So, let’s say for that same $1,000 you could own 3 shares in Apple ($333 each). As of July 17 of 2019, or one year ago today, that share was worth $203.35. Assuming the stock has that same growth from today to one year from now, then on July 17, 2021 the stock will be worth $462.65. Meaning your $1000 investment has now grown to be worth $1,387.95 in just one year (YOU ROCK!). This is an overly simplified example, and there are plenty of risks with the stock market, but there are also ways to minimize risk and it is something I love talking about so PLEASE comment down below and engage with this post to let me know you want to hear more!
Learn more about the difference between simple interest and compound interest.
Learn more about the difference between a Roth IRA and a Traditional IRA.
To learn about what is the stock market watch this video (and playlist if you want more) that got me started in learning how to grow my wealth.On July 29, 2020 at 4:34 pm by Kenneth Coleman
One of the most transformative lessons I learned in college was understanding how compound interest. During high school, I did not receive any formal training around financial literacy beyond learning how to balance a checkbook and understanding the connection between education and earning potential. Once I started actually making money, I begin to read investment books to learn how I could use my meager earnings to help meet future financial goals. It’s powerful learning I still use to this day!On July 30, 2020 at 4:14 pm by Nicole Williams
Yes! Compounded interest is so important and was not even a word I heard until I started doing my own independent searches into financial literacy. My school did not even teach us about writing checks, let alone balancing a checkbook. This is definitely something that needs to change!On August 10, 2020 at 4:16 pm by Kenneth Coleman
Have you explored any of these investment opportunities already? Are there any you want to hear more about? Do you have any advice or resources for those interested in learning more? Do you want more of these resources from myself and XQ?