IF YOU DON’T TAKE A RISK, YOU WON’T EARN ANYTHING.
You are ready to invest, but you don’t know where to start. With extra money in your hand, the last thing you want to do is lose it, but if you don’t take a risk, you won’t earn anything.
The key is to jump in and diversify. Fortunately, investing offers a variety of benefits including compound interest and dollar-cost averaging that help you along the way.
COMPOUND INTEREST – START INVESTING NOW
Compound interest is such a simple idea that everyone should be taking advantage of it. It refers to the money your earnings earn. Let’s use a savings account for a basic example. You put $100 in a savings account at 2% interest. If interest compounds monthly, at the end of 12 months you have $102. Now, if you leave that $2 in interest that you earned in the savings account, your earnings (the $2) earns interest and the compounding begins.You earn more money just by leaving your $2 in interest in the account. That $2 keeps growing over time and the longer you leave it, the more it grows.
The same is true of any investment. If you invest in the stock market today and earn money, the earnings can earn more if you reinvest them. This is common with dividends. Investors reinvest the funds to get more shares and grow their earnings even further.
DOLLAR COST AVERAGING – MAXIMIZING YOUR INVESTMENT
Let’s say you spread out your investments over six months. Chances are throughout that time, the asset’s prices will rise and fall. When they are high, you’ll buy fewer shares, but when they’re low, you’ll buy more.
Investors choose dollar cost averaging to help take the stress (emotion and fear) out of investing. If you react quickly when the market makes a move, you’re an emotional investor and may benefit from dollar-cost averaging. Rather than focusing on the cost at one time, you’ll average the cost of the investment over the entire period.
While compounding and dollar-cost averaging are two completely different topics, they have one thing in common – they are reasons to invest. If you invest now, you get your money working for you. Compound earnings eventually make your money earn money, which is great for passive investors.
Dollar-cost averaging helps average out the cost to invest, helping you take advantage of low prices when available without having to stalk the stock market.
Don’t let the terms scare you. Investing isn’t as hard as it seems, especially with the help of online discount brokers and Roboadvisors.