Investing in Your 20s & 30s For Dummies. Eric Tyson

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СКАЧАТЬ for example, I’ve enjoyed designing and running businesses that provide useful and valued services. I also enjoy having flexible work hours and not feeling like I’m punching a time clock to satisfy a boss.

Compounding Your Returns

      If you’ve read this chapter up to this point, you see that I’ve discussed the historic investment returns on common investments. To summarize: During the past century, stocks and investment real estate returned around 9 percent per year, bonds around 5 percent, and savings accounts about 3 percent.

In case you’re curious about some alternative investments like gold and currencies, here are those numbers. Gold has just kept investors up with inflation with a tiny bit to spare — returning an average of about 0.5 percent per year after inflation. Currencies like the U.S. dollar have depreciated about 1.5 percent per year adjusting for inflation. (There’s no reason to think that cryptocurrencies as a group will fair any better over time. See Chapter 15 for more information.)

      This section illustrates how compounding seemingly modest investment returns can help you accumulate a substantial sum of money to help you accomplish your personal and financial goals.

      The value of getting a few extra percent

      As I discuss in Chapter 1, investing in the stock market (and real estate) can be risky, which logically raises the question of whether investing in stocks and real estate is worth the anxiety and potential losses. Why bother for a few extra percent per year?

Here’s a good answer to that sensible question: Over many years, a few extra percent per year will increase your nest egg dramatically. The more years you have to invest, the greater the difference a few percent makes in your returns (see Table 3-1).

TABLE 3-1 How Compounding Grows Your Investment Dollars

For Every $1,000 Invested at This Return	In 25 Years	In 40 Years
1%	$1,282	$1,489
2%	$1,641	$2,208
3%	$2,094	$3,262
4%	$2,666	$4,801
5%	$3,386	$7,040
6%	$4,292	$10,286
7%	$5,427	$14,974
8%	$6,848	$21,725
9%	$8,623	$31,409

      These numbers are simply amazing! Start first with the 25-year column in Table 3-1. For every $1,000 invested over 25 years, you’ll have $1,282 at a 1 percent annual return. At a 9 percent return, you’ll have $8,623, or nearly seven times as much!

Now look at what happens over 40 years. At a 9 percent investment return, you’ll have more than 21 times as much money versus what you’d have with a 1 percent annual investment return.

      Here’s a practical example to show you what a dramatic difference earning a few extra percent can make in accomplishing your financial goals. Consider a 30-year-old investor who’s saving toward financial independence/retirement on his $60,000 annual salary. Suppose that his goal is to retire by age 67 with about $45,000 per year to live on (in today’s dollars), which would be about 75 percent of his working salary.

      If he begins saving at age 30, he needs to save about $690 per month if you assume that he earns about 5 percent per year average return on his investments. That’s a big chunk to save each year (about $8,300) — amounting to about 14 percent of his gross (pretax) salary.

      But what if this investor can earn just a few percent more per year on average from his investments — 8 percent instead of just 5 percent? In that case, he could accomplish the same goal by saving just half as much: $345 per month (or $4,150 per year)!

      Considering your goals

      How much do you need or want to earn on your investments?

      You have to balance your goals with how you feel about risk. Some people can’t handle higher-risk investments. Although investing in stocks, real estate, or small business can produce high long-term returns, investing in these vehicles comes with greater risk, especially over the short term.

      Others are at a time in their lives when they can’t afford to take great risk. If you’re still in school, if you’ve lost your job, or if you’re starting a family, your portfolio and nerves may not be able to wait a decade for your riskier investments to recover after a major stumble.

      If you work for a living, odds are that you need and want to make your investments grow at a healthy clip. Should your investments grow slowly, you may fall short of your goals of owning a home or retiring or changing careers.

      

All this is to say that you should take the time to contemplate and prioritize your personal and financial goals. If you haven’t already sorted them out, see Chapter 2 to get started.

Chapter 4

      Minimizing Your Taxes When Investing

      IN THIS CHAPTER

      

Seeing how investments are taxed

      

Understanding capital gains and dividend taxation

      

Employing strategies to reduce investment taxation

      

Considering tax issues when selling an investment

      You should pay attention to tax issues when making investing decisions. Actually, let me rephrase that. Like plenty СКАЧАТЬ