One of the key concepts you need to learn if you want to invest and earn money daily is compound interest.
According to Benjamin Franklin, “Money makes money. And the money that makes money, makes money.” This is compound interest at work.
Simply put, compound interest is the interest earned on the previous interest of your investments.
For instance, if you have a $100,000 investment with a 5% return each year, in the first year you would have $105,000. You invest $105,000 the next year, and it yields $110,250. You do this repeatedly yearly, and by the tenth year, you will have earned $62,889 in interest!
Based on the example above, you can see that time plays a crucial role in compounding interest. According to CNBC, if you are 35 years old and would like to become a millionaire, you would have to invest $590 per month at a 9% return before you retire at 65. But if you started five years earlier, you only needed to invest $370 per month to become a millionaire upon retirement.
Things To Do Before You Invest and Make Money
Do you feel you’re ready to invest to achieve financial freedom? Good! But there are a couple of things you need to consider before you enter this territory, and they are crucial to your journey as an investor.
Pay Off Your High-Interest Debts
Getting rid of significant high-interest debts should come first. Not only will you be able to free up more money that you could potentially use to save and invest, but you also eradicate debts that financially weigh you down.
For example, if your investments are raking in a 9% return every year, but you pay down 12% in interest on your debts, then you’re not really making a profit. So strive to pay down any high-interest debts in full before you dive into investing.
Prepare an Emergency Fund
Anything can happen at any minute, and you don’t want to be left with zero money to help tide you over financial emergencies. So, before you even start investing to make more money, make sure to build a solid emergency fundthat’s worth at least six months of expenses.
Be Financially-Protected
Another way to prepare for the unexpected is to avail yourself of financial protection that typically comes as insurance. You need good health insurance so you don’t get into debt paying medical bills. A life insurance policy is also beneficial for your loved ones should anything happen to you. By having the right protection in place, you can invest with significantly fewer worries.
Be Clear With Your Investment Plan
Identify your investment goals. Are you looking for something to retire on in thirty years’ time or are you saving for your kids’ college for the next five years with a 529 plan? Knowing your goals allows you to pick the right investment types. Also, figure out your risk tolerance. As most experts would advise, only invest what you can afford to lose.
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