Investing is an essential topic that is often overlooked by many until their later years, but this topic needs to be taken seriously due to the large number of people who currently depend on wages from work to sustain themselves. Investing has even become a more important topic, especially when most companies are gradually cutting back on generous pension benefits and shifting a lot of the retirement responsibility to the individual.  At some point in life the money saved from working will be one of the major sources of income for most people, and thus the need to figure out a way to grow those savings overtime as people work and grow old. This is where the concept of compounding in investing becomes very important.

 

 

So what is compounding: Compounding is interest that you earn on interest from an investment. If this concept sounds a bit confusing then let me break it down further. Suppose you put $50 in a bank account with the understanding that the bank will pay you 2% in interest every year on your $50 for three years. After year one your $50 will earn $1 in interest, increasing your total balance to $51 ($50 in initial savings plus $1 in interest earned). In the second year you will be earning 2% on $51 instead of your original $50 because your balance has increased to $51.  Compound interest is very important in investing because it can turn a few dollars today into big money over the course of a lifetime. If you placed $5,000 into an investment account today that earns 8% in interest and never touched that money for 45 years, that money will grow to $160,000 after 45 years.

 

Some people assume that you have to be very intelligent to be able to invest, but the truth is you only need to have some knowledge about investing, create an investment strategy and be ready to stick to it if it works. If these basic steps are followed through, a person should be able to achieve financial security and enjoy all of the benefits that come with it.

 

Guiding principles of investing:

 

The following steps can be utilized to help craft a suitable investment philosophy.

 

• Set a goal: Perform a thorough financial assessment of yourself, look at how much money you have and how much you are willing to invest.  Assess your risk tolerance and how much risk you are willing to take to achieve those investment goals.

 

• Come up with an investment strategy: An investment strategy will help you determine how you are going to achieve your investment goals. This step involves deciding on an investment time horizon, be it short term or long term, and then researching and selecting investments that can be used to accomplish those goals within your set time frame in a safe and efficient manner. You can usually afford to take on a lot more risk if your investment time horizon is long because you can make up for some of your mistakes. A short investment horizon however gives you little room to make mistakes and thus will be wise to invest conservatively.

 

 

• Investigate before you invest: Do your homework on any investments or people you decide to invest with.  Call your state securities regulator to check up on the background of any person or company that you're considering doing business with. Find out as much as you can about any company before you invest in it. Always beware of "get rich quick schemes." If someone offers you an especially high rate of return on an investment or pressures you to invest before you've had time to investigate, be very weary.