Happy New Year 2018! The New Year offers opportunities for a fresh start and new resolutions. As you reflect on possibilities, I encourage you to include investing in your personal finance as a high priority for 2018. We choose to do many things with our time and energy, and it's easy to let our finances become "another day" activity; however, time spent today will reap many benefits in the future. If you don't invest in your personal financial situation, no one else will!
Commit to spending one to two extra hours a month to moving your finances forward. These hours can be spent learning about a financial topic, making phone calls to compare insurance policies, or checking your credit report for accuracy – the list goes on. Today, let's talk about investing your money wisely.
Once you have money set aside in savings to cover unexpected expenses, consider investing. Investing money is best for long-term goals; those goals that are 10 years or further away. When you are planning for long-term goals, one of the most significant risks that you need to manage is the cost of inflation. The current inflation rate for the United States is 2.2% for the last 12 months, according to the U.S. Labor Department. While this is a relatively low inflation rate historically, it still has a significant impact on savings.
For example, if you have saved $2000 today and receive no return on the money, in 20 years this would only buy approximately $1300 of goods, assuming a constant inflation rate in the future. The main take-away message here is that your savings for the long-term must earn a return rate (in interest, dividends, or increased value) greater than inflation in order for your investments to truly make money for you. This return can be over time, not necessarily each year.
Given that it's difficult to find a savings account paying even 1% interest currently, we need to look beyond savings and money market accounts to find a way for our investments to grow. Savings tools, like savings accounts and certificate of deposits, are good financial tools for our emergency savings and for intermediate-term goals that will occur in 2-10 years. While the return (in interest payments) is low, the money is very safe and we can access it when needed easily.
To earn a higher rate of return, we need to use investment options that have a higher risk, meaning the investment value may go down or up over time and we may lose the dollars we invest. However, by considering historical data, and by using common investment strategies such as diversifying our dollars and planning for the long-term, our investments can grow 5 – 10% on average over many years.
To read more about how to diversify your dollars, I highly suggest my colleague, Karen Chan's, recent blog post, "Investing 101: Mutual Funds can Make Investing Simple."
Planning for the long-term is important. While different investing philosophies exist, many experts believe that investing for the long-term is a very important principle; this means leaving your money in investments and not paying high costs to jump in and out of investments. Too often people buy investments when they're popular and costs are high (for example, purchasing Bitcoins as the prices soared recently) and then selling as the price dropped.
When investing, keep these words in mind:
- If it sounds too good to be true, it probably is.
- The higher the potential gain, the higher the risk.
If you choose to invest in speculative investment choices, like Bitcoins, be sure you only invest what you can afford to lose. I recommend reading "Don't Fall for Cryptocurrency-Related Stock Scams."
Other investment options such as many mutual funds and employer-sponsored retirement plans offer lower potential gains, but significantly lower risk. In the long-term, these diversified investment choices will likely provide a return higher than inflation with only a moderate risk.
Before making investment choices, do your research. Read about investing strategies, talk to investment professionals, and plan for the long-term. You can learn more about choosing a financial professional to work with at U of I Extension's website, Choosing a Financial Professional.
Make 2018 the year you invest in your finances.