Summary: Today, simply keeping your hard-earned money in a savings account isn't enough to build wealth. Inflation can reduce your purchasing power, and interest rates are too minuscule to compensate.
Today, simply keeping your hard-earned money in a savings account isn't enough to build wealth. Inflation can reduce your purchasing power, and interest rates are too minuscule to compensate. Just this past year, the US consumer price index rose by 5% — the largest increase since the 2008 financial crisis. For instance, the cost of food and gasoline, in particular, was significantly affected. The average price per gallon of gasoline was $2.17 in 2020. In October this year, it rose to $3.34.
It goes without saying that your savings can be affected by inflation. Simply put, if you’re not investing your money, you are actually losing money. Fortunately, an ever-expanding number of investment opportunities can help you build wealth more effectively. Below are a few of them:
If you discover a startup and think it will be successful, why not help it get on its feet and look to profit from it? Equity crowdfunding involves buying a share in private startups, but unlike stocks which are already public, it can lead to significantly higher returns due to “getting in” early. Federal law even supports this measure, allowing companies to collect $5 million from crowdfunding annually. As a result, startups in South Florida alone were able to raise over $1 billion in the first half of 2021. There’s definitely a lot to be gained from becoming an equity crowdfunder.
Another way you can fuel businesses while generating a return on your money is by buying bonds — which are fixed-income investments — for as little as $10. Some examples of bonds are municipal bonds (where proceeds go to fund government projects) and corporate bonds. Being a bondholder can be relatively cheap and the investment has low-volatility, plus, it's a great way to build community wealth by supporting smaller businesses.
Another thing you can do is buy a property and rent it out to gain some passive income. However, being a landlord isn't for everyone: tenants might fall behind on payments, or you might have to pay to fix things that get damaged in the home. If this is the case, consider hiring a property management company to take care of the day-to-day dealings for you, or consider investing in properties indirectly, or joining a group of investors so the risk is spread out among its members can be very good options, too.
Finally, it’s important to understand that all investments carry some form of risk, so once you've decided what investments to venture into, it's good practice to consult with experts when creating your investment strategy. To this end, you can approach a financial advisor or an accountant. Modern programs in accounting provide professionals the opportunity to specialize in advanced financial skills like forensic accounting, auditing, income taxes, and advanced managerial accounting, which is crucial to investing. For example, accountants can use their knowledge in forensics and auditing to analyze a company's financial reports and identify any potential losses or gains.
Ultimately, advisors with accounting backgrounds are better equipped to guide you through creating and acting on an investment strategy.
Your financial advisor can make the investments for you as well, though if you want more control over where your money goes, you may also opt to open an online brokerage account. The accounts will allow you to manage all your assets on one platform and will usually only require a small fee (if any) for every transaction. Your advisor can still be there to guide you through your decisions.
Generally, it’s best to start investing as early as possible. This is mainly because most investments compound your returns, meaning the interest you earn is reinvested and increases your earnings exponentially. Say you invest $5,000 a year with a 7% annual return from ages 20 to 60. After 40 years, you'll have just over $1.1 million. Conversely, if you had simply saved $5,000 a year, you would only have $200,000.
Fortunately, it's never too late to start investing. Simply decide what to invest in and get professional advice so you can invest more effectively. By making your money work for you, you can successfully build more wealth.