What Does An Investment Calculator Do?
An investment calculator helps figure out how much you need to save to reach your financial object. Most people use an investment calculator when planning for retirement. However, you can also use it in figure college or house down payment savings.
How Do I Build Wealth and Achieve Financial Peace?
The most valuable tool you have to build wealth and financial peace is time. The more time you have, the longer your money can grow. Start investing as soon as possible.
In finance, there is a term, the time value of money. Essentially, it says your money is worth more today than it is in the future because of it's earning potential.
If you invest $100 today and let it grow over ten years, it will be worth more than $100. If you postpone investing when you're young and don't start until you're 30 or 40 years old, you missed out on 10-20 years of growth. Investing lets time do all the hard work for you. Invest the money in assets that will appreciate (increase in value over time). You receive easy money you did not have to work to earn. It's a gift of time.
How Can You Benefit From Investing?
Investing makes your money earn more money for you instead of you working hard for your money. While you're busy going to college or raising a family, your investments make money for you. Later, you can use the money for your retirement, dream vacations, home down payments, and more.
What Are Risk and Return?
You've probably heard the saying,
"the higher the risk, the higher the return."
Risk is the amount of "stress" you can handle, watching your investment move up or down in value. Return is your reward for dealing with that stress: profit.
If you're willing to risk losing some of your initial investment to gain more than you started with, you are tolerant of risk. You do not worry when the stock market goes down because you understand it will go back up. If you cannot fathom risking a penny of your money and need a guarantee your money will earn some interest, you are intolerant of risk.
Different Types of Risk
Market risk is the up and down fluctuations in the stock market. Your investment might be worth $1,000 today, $993 tomorrow, and $1,006 the next day. There's always a risk the market could crash. But historically, the stock market has still recovered and eventually gained more after a crash.
Your dollar today is more valuable than a dollar in the future. That is true because of inflation risk. The US faces an average of 3% inflation each year. So your money may have the buying power of $100 today, but next year, it might have the buying power of $97. Inflation risk is why 100 years ago, people bought houses for a few thousand dollars. Now they cost hundreds of thousands. If you withdraw your money from the market, you risk losing your dollar's buying power. You must earn enough interest to compensate for inflation risk.
Liquidity risk is the difficulty of converting your asset to cash. For example, stocks and bonds are liquid because you just place an order to sell them, and you receive your money in a few days. Real estate is less liquid. It can take a month or years to sell a property. Businesses (as an owner) are less liquid than real estate because there are not as many people shopping for a business as shopping for a home.
Concentration risk is that old saying, "don't put all your eggs in one basket." Enron's employees, whose entire retirement account was invested in Enron stock, had high concentration risk because they did not diversify their investments. Diversification protects you if one investment performs poorly. Other investments continue to perform well, so you do not suffer a total loss. Likewise, you don't want to invest solely in one industry, sector, investment type (like stocks), or even one country. The more you spread the risk and buy diverse types of investment, the lower your risk becomes.
When you sell an investment, you typically reinvest that money into something else. Suppose you bought bonds when interest rates were very high, and bonds were paying a lot of income. Then, you sold those bonds and purchased a stock that your friend recommended. Reinvestment risk says the "grass may not be greener on the other side." That is to say, your next investment might not perform as well.
Credit risk means a government or business entity cannot meet its financial obligations anymore. Greece had a major credit problem several years ago, and it hurt their financial reputation. However, credit risk is not exclusive to bonds. People who invested in JCPenney that went bankrupt because of the pandemic lost their bond (debt) investments. The value of the stock dropped. Companies that do not keep enough cash in the bank to meet their obligations in an emergency create credit risk for investors.
Foreign investment risk
You may know the US market well, but what about foreign and emerging markets? Local political or disaster issues can create more risk for your investments overseas.
Longevity risk is the chance you might outlive your assets. If you do not save enough for retirement or live longer than you expect, you face longevity risk. Once you run out of savings, you must figure out how to pay your bills without that source of income.
Horizon risk is the circumstance of needing to access your assets before you planned.
When the pandemic hit, and many people lost their jobs, Congress changed some of the rules for tax-friendly accounts like 401(k)s and IRAs. Typically, job loss is not a lawful reason to take money out of those accounts penalty-free. However, the circumstances necessitated a temporary change in rules.
The risk is that when you take those nest egg funds out for living expenses, they can no longer earn more money for you. It affects the time value of your money.
Unforeseen emergencies like the pandemic are why financial advisors recommend keeping at least six months of living expenses in a savings account. The advantage is that it is liquid and won't adversely affect your investment plans.
What Is Diversification?
Diversification is the cure for concentration risk. You can diversify not only your investments but your income streams as well.
First, you can create a mix of stock market investments. Typically, financial advisors call this an asset mix. How much risk are you comfortable taking? Based on that understanding, you can choose a percentage to invest in stocks, bonds, and cash.
A stock portfolio could contain large companies, small companies, companies from very different industries, US companies, or foreign companies.
A bond portfolio could have:
- Short term bonds that are lower risk
- Intermediate bonds that are usually issued by governments
- Long term bonds with more risk
- Corporate bonds vs. government bonds
- Domestic or international bonds
Your diverse portfolio might also include real estate or ownership in a business.
What is the Starting Balance?
The starting balance is your initial investment amount--the amount of money you have now. It's the seed money on which your tree of wealth will grow.
Your starting balance can be as little as $100 or hundreds of thousands. Everyone starts somewhere. The more you have, the more options for investment vehicles you have.
For example, some mutual funds have a minimum investment of $3,000 or $5,000.
When you first start investing, keep it simple. If you overwhelm yourself with investment options at first, you may be tempted to quit.
What are Contributions?
Contributions are the investment amounts you make weekly, monthly, or annually to your investment programs. Usually, contributions refer to payments into your tax-deferred or tax-free accounts like 401(k)s and IRAs.
What Is Rate of Return?
Rate of return measures the profit and loss (money gained or lost) over time compared to your original investment.
Suppose you invested $1,000 and one year later, you have $1,100. That's a 10% rate of return.
How Much Will I Need in Retirement?
Your retirement savings needs depend on several factors.
- Your age today
- Your income today
- Age you plan to retire
- How much you save every month/year
The younger your age when you start investing, the less you must save. Time will work hard to make money for you. If you are 40+, you will need to set aside more of your income.
If you want to maintain the same lifestyle you have now, you will need more in retirement to maintain a similar income. If your income now is low, try to supplement it with side jobs or gigs and save everything you receive on the side.
Age of Retirement
The sooner you retire, the more you need to save as quickly as possible. If you plan to keep working to age 70 or beyond, you may not need to save as much. However, if you become disabled before age 65, you might have to access your nest egg earlier than planned.
How Much You Save
The more you set aside now, the greater your nest egg will be in the future. When your money has more time to grow untouched, the better it will perform. If you cannot afford to save much or anything now, you will have to save significantly more later to reach your goal.
If you do one thing today to start investing, you can begin. Please do not put it off any longer.
Now that you see how important having time on your side is, put it to work. Start investing as much as you can. It does not have to be a high-risk asset. The longer you wait, the more difficult it becomes.