(U-WIRE) CHARLOTTESVILLE, Va. – Allocating enough money to support a Friday night bar bill may be easy enough. But imagine a time, distant as it may seem, when other expenses will become a reality. Saving just a few dollars to invest now can garner huge rewards in the future.
Although college students stereotypically are strapped for cash, investing early maximizes profits in the long run.
Your Savings Account and Compounding Interest
Based on the miracle of compounding interest, money can grow at an exponential rate when earning interest on itself. For example, by investing $1 today at 10 percent, that compounds to $1.10 next year. To put it in perspective, if that earned interest reinvests itself, that $1 today will amount to $117.39 in 50 years. No wonder Ben Franklin called compounding interest the “eighth wonder of the world.”
Unfortunately, the typical university student does not have a surplus of cash lying around to put away. “When you’re in college, it’s difficult to invest anything,” University of Virginia Commerce Professor Patrick Dennis said. “I barely had enough to buy beer and pizza.”< /p>
But even though it may seem costly to invest now, the losses incurred by not investing until 10 years down the road — in terms of lost compounded interest — never can be regained. To get a better picture of how important time really is, consider this: If a 20-year-old puts $1,000 into a mutual fund that returns on average 12 percent a year, by the time he turns 50, that money will have grown to $35,949. But if he waits until the age of 30 to begin, the return will amount to $10,892. A decade can make quite a difference.
“If you have a good income from a job, treat an investment like a bill you have,” Dennis said. “Pay that first, just like you would pay your power, your phone or your rent. That’ll help invoke discipline.”
The rookie investor’s best friend. First-time investors should opt for a mutual fund in which investors pool their money in one large, centralized fund encompassing a vast number of stocks.
Generally offer the best bets for a beginning investor looking for diversification. “Speculation in one stock is risky,”
University of Virginia Commerce Professor Karin Bonding said. “If that one stock drops down, you’re left with nothing.”
Diversification, buying several types of assets across various industries, smoothes the overall returns and reduces the impact of any one investment in the general portfolio.
Index funds include the Dow Jones Industrial Average (traded on the New York Stock Exchange.)
Other indexes include the Russell 2000, which follows the 2,000 smallest publicly traded companies, and the Standard and Poor’s 500 (more commonly referred to as S&P 500), which watches the 500 largest companies in America.
When shopping for a mutual fund, you should be aware of purchasing funds solely on the basis of how they did last year, as that is not the best indicator of how the fund will continue to grow in the future.
Researching mutual funds?
Whatever your goals are, educate yourself about the world of financial assets and its terminology.
Copyright ©2003 Cavalier Daily via U-Wire