Your first home. College for your children or grandchildren. A comfortable retirement. These are just some of the reasons why you might choose to invest. Even if your list is different, chances are you will work with your financial adviser, following these steps:
1. Identify your goal(s) and time horizon.
2. Set aside a portion of your income.
3. Put your money to work in the financial markets.
Investing and Saving
When you “save” in a bank savings account, a Certificate of Deposit, a U.S. savings bond or a money market account, you can expect to receive a rate of return that is tied to current short-term interest rates. In fact, some savings accounts even offer guarantees that you will receive your money back as well as a stated rate of return.
Investing is different from saving because it involves the risk that the value of your original investment could fluctuate, and no return is guaranteed. Yet, it’s hard to imagine that you can achieve your long-term goals without investing. History shows that investing in the stock and bond markets provides greater returns than most investors can earn through guaranteed savings. And, the risks of investing diminish over time, while the hidden risk of saving increases over time, because of taxes and inflation.
Staying ahead of taxes and inflation
When you are aiming for a long-term financial goal, taxes and inflation can be your two worst enemies. Federal taxes subtract between 15% and 35% of the financial earnings generated by a savings account or any other taxable investment. The money you earn may also be subject to state taxes. Each year, inflation reduces the purchasing power of each dollar at an average annual rate of approximately 3.1%, according to Ibbotson Associates, an investment research firm.
When you think about these hurdles, it’s easier to see the need for a healthy return. If you’re really going to come out ahead of taxes and inflation, you need to think about investing in the stock and bond markets. Over the long term, and despite the ups and downs of both markets, they have outperformed “savings” by a wide margin.
You don’t have to be an expert to be a successful investor. But it’s easier to invest with confidence if you get the expert advice of a financial adviser.