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Most people think of saving money as putting it in a low interest savings or checking account at the bank that they already do business with. They find it comforting that the money will be there when they need it and they know how much they have at all times. They follow Stock Market Analysis.
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Make your money work for you! By SmartMoneyGains.com
INTRODUCTION Most people think of saving money as putting it in a low interest savings or checking account at the bank that they already do business with. They find it comforting that the money will be there when they need it and they know how much they have at all times. They follow Stock Market Analysis. What they don’t realize is that they are losing money slowly by letting their money sit around. How are they losing money you might ask?
Inflation Inflation is a sustained increase in the general price level of goods and services in an economy. When the general price level rises, each unit of currency buys fewer goods and services. The amount of inflation may differ from year to year but that doesn’t stop it from happening. On average, you can expect inflation to be roughly 2%. Why does this matter? The simple answer is as inflation rises, the value of your dollar goes down. For example, if you have $100 sitting in a no to low interest account over the course of a year, your $100 value will have decreased to $98 in value. I know this doesn’t seem like a lot of money lost over a year, but we also used a very low starting amount of $100. The amount you lose increases with the more money you have put away. As governments increase the money supply the overall purchasing power decreases as you can see from the chart below.
Opportunity Cost Another way you are losing money is in the form of opportunity costs. What this means is, even though you aren’t technically losing your money, you are giving up the chance of making more money, therefore “losing” it. This may be a new discovery for you and you might want to know a simple way of avoiding losing your money in the ways mentioned above, lucky for you, there are easy solutions to this problem.
Solution one Solution number one (a very, very easy solution) is to put your money in a high interest savings account. A great example of this and the one I use personally is Ally online banking. Ally is a very simple and secure bank online that pays around 2.2% interest for you to use their savings account. This not only beats out the average inflation but also allows you to receive compound interest. If you don’t know what compound interest is, you should definitely look into it, but I will give you an example of what makes it so great.
continued... Compound interest is a great way to increase your money by not touching it because you earn interest on top of the interest you previously earned. For example, say you deposit $10,000.00 into an Ally account paying 2.2% interest. After a year you would earn $220 in interest. The next year that comes around, you are no longer earning interest on your $10,000.00, now you are earning interest on $10,220.00. This continues on for as long as you leave the money in the account and only increases what you earn the more you add to it. This is where the phrase, “making your money work for you” comes from.
Solution two Solution number two is to invest into the stock market. Trust me I can hear the panic now. “I’m not investing in the stock market and losing all my money!” Well then don’t invest in something that will cause you to lose all your money. The stock market is a tried and true way of earning good returns on your money, if you invest it correctly. The average annualized return of the S&P 500 Index was just over 11% percent from 1973 to 2016. In any given year, the actual return you earn may be quite different than the average return, which averages out several years’ worth of performance.
continued... Don’t put all your money on a penny stock that you hope might blow up and make you millions, I promise, it won’t. Take your money and invest it in long term companies (I personally own Microsoft, Visa, and Home Depot) or put your money in an index fund. If you don’t know what an index fund is exactly or even how the stock market really works, I am diving into more detail on that in the next post. To sum it up though, an index fund combines a lot of great stocks into many different portfolio styles. You can buy a dividend stock index fund, broad market index fund, technology index fund, and so on.
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