Lotteries rake in billions of dollars every year for one simple reason: We all want to be wealthy. But the reality is, lotteries take money from people a lot more often than they give it out. If you're serious about growing your net worth, you'll need a different strategy -- and a little bit of patience.
The secret to becoming rich is putting your money to work for you, rather than letting it sit more or less idly in a savings account or sinking it into belongings to make yourself appear wealthier. Investing your money does require risk, and it's not the best choice for all of your savings. But if you don't plan to use your money in the next few years, you may as well invest it, because there's a good chance you can turn that initial sum into a much larger one.
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How much can you make by investing your money?
The amount you'll earn by investing depends on the following four factors:
- How much money you invest.
- What you invest it in.
- How long it's invested.
- What you're paying in fees.
The more money you initially invest, the more you'll end up with, assuming you've chosen the right investments. Some investments, like stocks, grow more quickly than others, like bonds. Then, there are bad investments that can actually cost you money if you're not careful. The longer you leave money in your account, the more time it has to appreciate in value, again assuming you've invested wisely.
Your brokerage's fees and investment fees will take away some of your profits, but how much depends on where you invest and what you invest in. Always look at a broker's fee schedule before you open an account and check into any fees associated with the investments you're interested in. Try to keep both of these to a minimum if you want to maximize your profits.
To give you a sense of how much your money could grow over time, consider the following table, which compares investing $1,000 with a 6%, 8%, and 10% annual rate of return over various periods of time, versus the traditional savings account's annual percentage yield (APY) of 0.08%.
Saving vs. investing $1,000
|
Years Invested |
Savings Account (0.08%) |
Invested With 6% Annual Rate of Return |
Invested With 8% Annual Rate of Return |
Invested With 10% Annual Rate of Return |
|---|---|---|---|---|
|
1 Year |
$1,001 |
$1,060 |
$1,080 |
$1,100 |
|
2 Years |
$1,002 |
$1,124 |
$1,166 |
$1,210 |
|
5 Years |
$1,004 |
$1,338 |
$1,469 |
$1,611 |
|
10 Years |
$1,008 |
$1,791 |
$2,159 |
$2,594 |
|
20 Years |
$1,016 |
$3,207 |
$4,661 |
$6,728 |
|
30 Years |
$1,024 |
$5,743 |
$10,063 |
$17,449 |
Source: U.S. Securities and Exchange Commission Compound Interest Calculator. All figures are rounded to the nearest dollar.
That savings account isn't looking so good anymore, is it? If you'd left that $1,000 in your savings account for 30 years, you'd end up with $16,425 less than you would have if you'd invested that money and earned a 10% annual rate of return. Of course, the above example is imperfect. No investment offers a 10% rate of return every year for 30 years. But this gives you some idea of the difference investing your money can make over the long term.
When should you invest your money?
Investing can increase your wealth a lot, but it isn't always the right decision. It's best if you don't anticipate needing that money for anything else within the next few years. You need to keep the money for your bills liquid every month, and you also want to keep your emergency fund somewhere easily accessible, particularly now. Investing it is a bad idea because some investments (stocks in particular) are volatile over the short term; if you need to withdraw your money in a hurry to cover an emergency, you might have to take a loss. You're better off leaving these funds in a high-yield savings account.
It's also not a great idea to invest money you expect to use in the next few years for a large purchase, like a home down payment, again because of the volatility of some investments over the short term. If you don't want to just leave that money in a savings account, you could try a certificate of deposit (CD), which offers a higher APY than most savings accounts, but ties up your money for a set number of months or years. CDs are backed by the FDIC up to $250,000 per customer per bank. You could also try investing in short-term bond funds.
Investing won't make you rich overnight. It requires time, smart choices, and patience. But if you stick with it, you could end up increasing your wealth significantly. You don't need a lot of money to get started, though the more you invest, the greater your earning potential.
