At some point, we all want to live a comfortable, retired life. In our younger days, we set out working hard to establish regular income and hopefully savings. We hope that in the end we can use what we’ve accumulated through our life to live comfortably, without worrying about obtaining an income. Indeed, many retirement options are designed to act as an income. But in order to reach that position, we have to know precisely how to save and invest. Most of us do not have a rich inheritance or will carve out a billionaire life for ourselves, due to the current economic climate. Instead, we must think about smaller investments with the goal being that they turn out big at the end of the investment period. In the same way a large house is built of smaller bricks, laid down over a long time, so we can create wealth.
The most important step in saving is starting early. Time is not money’s friend, unless we begin preparing and managing our finances early on. Starting early is beneficial since it means putting less aside than if we started later. For example, if we hoped to retire at 65 with a certain amount, starting at 28 versus starting at 38 will mean very different amounts being set aside each month.
Longer time also means more compound interest can accrue. As Investopedia defines it:
“Compound interest can be thought of as ‘interest on interest’ and will make a deposit or loan grow at a faster rate than simple interest. The rate at which compound interest accrues depends on the frequency of compounding; the higher the number of compounding periods, the greater the compound interest.”
Starting early then works to our advantage. However, there are also other considerations, especially when it comes to the volatile market we find ourselves in. Richard Barringont, CFA and primary spokesperson for MoneyRates.com noted:
“As Retirement saving may be more challenging today than it’s ever been. People are living longer than ever and thus must support themselves for an increasing number of years, yet a changing economy can quickly make the skills of older workers outmoded. Meanwhile, interest on savings accounts and other traditional income vehicles has all but disappeared. The absence of income production puts all the more pressure on savings to carry the load in retirement.”
The point being we must reflect on how much has changed. Our retirement might have to come sooner, but it might last longer. The vehicles that used to be in place are slowly being phased out, meaning retirement is almost entirely dependent on proper savings.
Other types of Investments
Of course, another way to help turn small amounts into wealth is focusing on other kinds of investments. There are a range of investments to consider, each one operating under different conditions serving different ends. A savings account is just one type, though many don’t like referring to savings as an investment. As The Balance points out:
“investing money is the process of using your money, or capital, to buy an asset that you think has a good probability of generating a safe and acceptable rate of return over time, making you wealthier even if it means suffering volatility, perhaps even for years. True investments are backed by some sort of margin of safety, often in the form of assets or owner earnings.”
Even within different investments options, we should consider other parameters like tax free investments. First, it’s important to consider what an investment is. The key difference between an investment and savings is the possibility of significantly higher rate of return. As Hands on Banking notes:
“Your investments may appreciate (go up in value) over time. This increases your net worth, which is the value of your assets (what you own) minus your liabilities (what you owe). If you sell for higher price than you invested initially, you make a profit.”
It’s worth broadening our choices, whether looking at tax free investments in India or real estate in our home town. Each serves different ends. It’s important that we decide what we want to do with our money and where it will be going. Obviously, retirement is the common option for many. As CNN Money notes, investments tend to be ideal for long term investing. “Stocks’ return potential gives them the best chance to beat inflation over long periods. That’s why they’re an essential part of a good retirement portfolio.”
Tax can catch us, of course, which is why it’s important to look at tax free investment options and figure out how to reduce liabilities.