Investing in stocks is a way to leverage profits generated from great companies over many years in hopes for a nice return on your investment. Investing is a tool to reach your particular financial goal. Goals that may include saving for your children's college, supplemental income, funding for charity/programs and retirement. Of course I hear people say investing in stocks is risky! Those are usually the people that think investing in CD's and savings accounts is a good idea. Or they have no money because they own one of everything. That my friends is keeping up with the Joneses! I can address both of these issues and suggest a way to have your money working for you.
I don't mean to offend anyone that may own CD's or have a substantial amount of money in their savings account, but I believe investing in stocks is a better alternative.
I would never invest in CD's aka Certificate of Deposit. Never! Never! Never! Here's why.
Current Example: 10 yr CD Rate vs. stock that pays the same dividend yield
$10,000 investment
10 yr CD Rate 2.23% $10,000 would roughly turn into $12,467.62 That's about $246.76 a year.
Now you may say well if the rates are the same it should return the same amount of money. This is true, but stocks offer dividend reinvestment, appreciation in the stock price, and increased dividend payout. That's the game changer!
A stock that raises its dividend distribution 10% annually for 10 yrs would turn into $14,840.08 That's $2,372.46 more than the same amount of money invested. Almost double the money! Obviously doing this for 30-40 yrs would be substantial to your portfolio.
At 30 yrs $10,000 invested in a CD with a rate of 2.23% would turn into $19,379.87
30 yrs with a stock that pays a 2.23% dividend yield and raises dividend distribution 10% annually (Remember dividends are reinvested) turns into a whopping $433,637.11 Over 30 yrs annualized return with dividends reinvested equates to 13.39% return on your money.
Obviously, this is purely an example and is very realistic for a company to increase dividends at a rate of 10%. That means the CD investors are missing out on a lot of money! $400,000 of cold hard cash. Even if I'm off by a bit the return on dividend paying companies that increase their dividend payout consistently overtime will destroy a CD!!!!! The risk is well worth the reward...
CD rates will go up over the next 30 years, but you get the point!
The example above shows that $10,000 of your money has the potential to turn into something great! Using stocks as a vehicle to generate the money for you. Imagine trying to save $400,000 on your own. Let's say you made $50,000 a year and saved roughly 10% or $5000 per year. Without the help of an investment vehicle compounding over time it would take 80 years to save that kind of money. That means at my current age of 30 I would be able to save $400,000 by the time I'm 110. No thanks man!
Now as for a savings account the interest is much worse and I don't consider this an investment. A savings account is meant for emergencies and short term liquidity. Having 3-6 months of expenses in a savings account is the most anyone should have tied up in something that isn't keeping up with inflation. Once your savings is built I would put the rest of your money to work for you. Consider each dollar you save as an employee. Invest in assets not liabilities, whether it be equities, real estate, commodities etc etc.... Overtime your money will grow aka your employees and you will have a nice chunk of change generating income every year. Eventually, your money will create enough income to replace your earnings you bring in as an employee, which in turn leads to retirement! Retirement or a choice to do anything your heart desires... It's always great to have choices.
Lastly, the part of about keeping up with the Joneses is by far the biggest wealth destroyer. It's sad to see people deeply in debt because they want to impress their friends. Continually buying stuff that you can't afford over your lifetime will put you in the poor house. The only person you are making rich are the banks and credit card companies. The next time you buy something think to yourself do I really need this crap? Most of the time its a want and not a need. Buying toys overtime is good in moderation. Just think! Eventually your investments will generate enough income that you can go buy anything that you would like. Buying stuff you can't afford early on in life will dramatically slow down your opportunity to create tremendous wealth. I promise you that! I was that guy in college. I was so broke I couldn't even think straight! I have learned from my mistakes early on in my life and I'm grateful for that.
This is the reason why I'm so passionate about teaching others to invest for their future. The winning equation is to buy more assets than liabilities throughout our lives. That's it! Plain and simple.
Have a great night!
Clay
Full Disclosure
Current Holdings:
Cosi Inc. (COSI)-Monster Portfolio
Caterpillar (CAT)
Westport Innovations (WPRT) Monster Portfolio
Kinder Morgan Energy Partners (KMP)
I'm not a licensed financial advisor. All recommendations is strictly my personal opinion and the information is intended for learning purposes only. Invest at your own risk!
