The key to ensuring future prosperity lies not in your ability to accrue wealth, but rather it lies in your ability to save. Though it's a common cliché, tightening the belt on one’s spending can improve a person’s chances of a financially free future far more than a raise, promotion, or new career. Saving one’s income will bolster their chances of remaining financially stable in the case of an emergency. Whether the crisis is a car accident, injury, layoff, or other disastrous circumstance; these unplanned events cost money and will abruptly drain a weak reserve of protection. While saving is important, it is not wise to stash your fortune under the mattress. Instead, people should be mindful of the opportunities that exist to use their wealth to generate additional money. Allocating your savings in places that will earn you money not only beats inflation but adds a pretty penny to your overall worth. Most people recognize that money can be issued to a variety of different portfolios. The common and most popularized of these locations include bank accounts, stocks, and real estate. In this article, we will examine the simple versions of these investment types and debunk the pros and cons of each.
For the average American household, investing in a home is by far where most of a family’s income goes. While real estate tends to be somewhat stable, the investment type presents many problems and often returns at a lower rate than the overall market. Houses depreciate at a steady rate of about 3.36% each year. We have all heard of people doing remodels, landscaping, renovations, and repairs. These investments in one’s home rarely serve to improve the price of their home, but only act as maintenance to heed a home’s depreciation in value. But why do home prices continue to go up in nearly all parts of the country? The real reason that the value of a property rises is because of the increase in the value of the land that the home is built on. The average ROI (return on investment) of property in the United States is a respectable 5%. Real estate in most parts of the country compound annually (growth based on previous growth). Before making an investment it is important to examine your prospective return. For example, if you bought a home worth $300,000 ten years ago at an average growth rate of 5% which compounds once a year, you would find that your investment is now worth $488,668.39. While this number does seem sizable, one must remember that the far majority of houses are bought with a mortgage and incur maintenance costs over time. These factors decrease the overall gain in wealth that a house can contribute. Moreover, real estate is difficult to transfer money in and out of. With these factors in mind, it becomes apparent that the wealth a person can generate from a home is moderate, but not the best option in all cases.
Additionally, another commonplace to allocate savings is in a bank account. Nearly, everyone owns a bank account and most people deposit their checks and cash into these accounts regularly. Savings accounts generally create interest on your money that often ranges from .01%-.1%. A moderate amount of money placed into a savings account will build up over time. Money placed in savings accounts is very liquid, meaning value can be easily transferred in and out of the account. The liquidity of this saving method is the key factor for why many consider it to be the best place to store your money. Once again, we must examine the prospective return for placing your money into a savings account. If you were to place again $300,000 into a savings account at an interest rate of .05% which compounds monthly, you would find that in ten years your balance would be $315,378.04. Clearly, this method generates far less wealth than real estate, but the risk of placing your money into one of these accounts is virtually nonexistent. Likewise, transferring wealth in and out of a savings account is much simpler than being forced to sell, buy, and refinance property as you must for real estate. For this reason, many Americans consider a savings account as a location to store a modest amount of money for emergencies and small purchases, but not as a central location for building large amounts of wealth over time.
The final and most important investment form that we will examine is investing in the stock market. Wall Street is known by many to be a place where trillions of dollars are invested, transferred, earned, and unfortunately lost daily. To some, the stock market has the same chance of earning you a return as spending a night at the casino. This myth could not be more false and represents a fatal idea that leaves many Americans without a substantial retirement fund. There are thousands of methods, techniques, and mantras dedicated to creating the highest return in the market, but the most simple and effective method of investing in the market simply consists of buying the entire market. This statement may seem surprising as there exist entire companies dedicated to researching the best stocks that will gain the most value. In fact, for the individual investor, it has been proven time and time again that investing in a broad market fund such as the Standard and Poor’s 500 will generate a much higher and consistent return than choosing to allocate your money in any high-tech mutual fund with a fancy-sounding name. The reason behind this is that choosing to invest in the entire stock market mitigates your risk and balances out the losers with the winners. For the 229 years that Wall Street has existed, the market has generally risen 10% each year. Investing 300,000 into the stock market for ten years, you will find that your portfolio has grown to a massive $815,372.87. This return is by far higher than real estate and savings accounts previously discussed. While the opportunities for return are very appealing, we must also consider the cons of this investment method. Taxes are among the most popular reasons that people choose not to invest. In the United States, there exist large taxes on capital gains which are the profits you make from an investment. Depending on your income, you can potentially be taxed up to 20% on your gains which is a sizable proportion depending on how much money you profit. While it may seem daunting at first, the government does provide tax write-offs in the case that you incur a loss. These write-offs may not eliminate losses in the market, but they do serve as a cushion against total destruction. Clearly, investing one’s money into the stock market offers the best chances to grow one’s wealth over time.
In essence, to unlock access to the methods of accumulating wealth discussed in this article, one must save a sizable portion of their income. Once cash is accrued, a multitude of investment options can be explored and chosen based on a person’s needs and desires. Remembering the term “don’t put all your eggs in one basket,” people should be mindful to not too heavily rely on one out of the many choices available to them. Instead, a proportion of wealth should serve to explore the sectors discussed. While investing in the stock market may seem the best choice from this article, one should remember the risk and volatility of this form compared to others. Overall, where and how you invest your money is your sole choice and will ultimately decide your financial future.
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