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In 2005, people spent 125% of what they earned. They spent money they hadn’t yet earned, so they ran up debt and paid interest on that debt every month. If you spent less than what you earned than you were actually paid interest on your money, quite the opposite. The return you can expect on that hard-earned money depends largely on the level of risk associated with it. However, no risk equals no reward; risk is not some great scary animal that we all run from.
The first thing to decide is how much money you want your investments to generate. It could be 1% to 30% and everything else. The one percent return is incredibly low but very safe. Actually 100% safe since that’s what your savings account pays for. If you think you are making money in your savings account, then you forgot to think about inflation. Suppose inflation is around 3% per year. If your investments are earning 3%, you’ve breakeven. He did not earn a penny because inflation took away 3% of the purchasing power that his money had a year ago. $ 100 today is only worth $ 97 in a year. If your investment was 3%, which is $ 3, it returns to $ 100. Get a 3% discount on your return and that is your true return.
If you want high performance, don’t expect to risk a downpour. The higher the reward, the greater the risk you should consider. The bonds are currently around 5%. This is 5% safe and you will not lose that money. Once you factor in inflation, it suddenly turns into gas money. Stocks have outperformed any other investment in any 20-year period. Stocks make most cringe, but there are many ways to enjoy the rewards of the stock market without worrying about losing your children’s college fund. You can buy an index fund that invests in the S&P 500 or the Dow Jones. The S&P 500 is 500 companies. If you invested $ 500, $ 1 would be in each of the companies. The S&P earns about 10% annually. There is a very small chance that the S&P will hit zero, although there are years of correction. That is why it is necessary to invest in the long term. If you start buying in one of those correct years, you will lose money, but think long term and you will find that you buy a lot in those correction years. Buying low and selling high is the game, but many of us do it the other way around.
When investing, not only the risk and reward are important, but also your age. This may be new to you, but age is very important when investing. Age tells us what level of risk to expect. If you are 20 years old, you should invest in the highest risk funds possible. The reason is that a person has more time to replace that money if they lose everything. A retiree does not have those years and the advice is the opposite. Little or no risk and invest only in fixed income, which are bonds and CDs and 100% safe alternatives. The older you get, the less risk you should allow. 10% of fixed income for each decade of age is a general rule of thumb. Do the math and determine your level of risk.
There are many safe investments out there, but as the saying goes, “no pain, no profit”. The reward for “the pain” is the 10% and more return you can enjoy.