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6 Investment definitions
First off, you want to start investing as soon as possible due to the term compound interest. Compound interest is best friends with those who are young. The ones with youth on their side have the most investment upside; they can tolerate more risk and have more time to build their investments.
If you’re getting into investing as a 20 something, take this as a blessing from your higher power. You’re setting yourself up to be a default millionaire off of virtually little effort.
Helpful Terms To Familiarize Yourself With
Compound Interest
Whenever you invest your money, it earns interest. And as you continue to let your money invest, it will continue to accumulate interest. The more years you give your money to invest, the more money you accumulate.
Chart Source: The BalanceAs you can observe from the chart, the more time you give your money, and the higher the rate of return, the more money you will accumulate over time. The kool thing about compound interest is the earlier you start, the less you need to invest. However, the later you start investing, the bigger our investment contributions need to be, and the opportunity cost increases.
The foundation behind compounding interest is the concept of the time value of money, which states that the value of money changes, depending upon when it is received. Having $100 today is preferable to receiving it a few years from now because you can invest it to generate dividends and interest income. Compounding allows that money to grow. If you waited two years to receive that $100, you’d miss out on two years of compounding interest. This is known as opportunity cost.
Opportunity cost is the loss of possible gains if an action is not chosen. In this case, the opportunity cost is equal to the amount of money you do not get in interest if you don’t invest in that money.
In our earlier example, if you don’t invest the $500 in an account with 10% annual interest, you’ll lose the opportunity to earn $50 per year. In 10 years, your $500 could have been $1,296.87.
ROTH IRA
A ROTH IRA is an investment account that allows you to invest post-tax dollars for your future retirement years.
This account has a contribution limit. For 2022, the contribution limit is $6,000 if you’re 50 and under. If you’re 50 and older, you can contribute $7,000.
There is one more limit – an income limit. Your adjusted gross income must be below $129,000 if you contribute to this account type.
401K
A 401K is a retirement account offered by an employer. This type of account allows you to contribute more than a ROTH IRA.
For 2022, the contribution limit for those 50 and under is $20,500. For those over 50, you can contribute $27,000. There is no income limit for the 401k, and your employer will often match your contributions up to a certain percentage, which is free money.
Many companies contribute anywhere from 1–10% of your paycheck contributions. If you can, max out your contributions to this account, and always sign up for the 401k as soon as your start working, so you can take advantage of your companies match (aka free money). If you earn $80,000/year and your company matches 6% of your 401k contributions, that equates to an additional $4,800 per year. So your actual salary is $84,800/year.
Bonds
“A bond acts like a loan or an IOU that is issued by a corporation, municipality, or the U.S. government. The issuer promises to repay the full amount of the loan on a specific date and pay a specified rate of return for the use of the money to the investor at specific time intervals.” – JP Morgan
These types of investments are considered low-risk and not aggressive.
Stocks
“A long-term, growth-oriented investment representing ownership in a company; also known as ‘equity.'” – JP Morgan
These types of investments tend to be higher risks than bonds and can be more aggressive depending on the stock category. If you’re investing in cryptocurrency, this is considered an aggressive investment.
Cryptocurrency
Crypto is another word for tech stocks. Imagine cryptocurrency and blockchain technology as the next Apple, Microsoft, or Amazon. Start investing a little bit each month (whatever money you’re willing to lose).
Since cryptocurrency and blockchain are such new and disrupting technologies, there is a huge opportunity to grow your investment with very little capital. The best time to get in is now, while many still offer a low share price.
This content is for informational purposes only — not professional advice. Consult a qualified professional before making any major decisions.