months’ worth of fixed and variable expenses in checking, money market, savings or short-term certificates of deposit.
The key to growing your money, however, is the development of a solid investment plan. The average yield on a money market account is 3.5%, which can easily be eaten up by inflation and taxes. For instance, if inflation is a modest 1.5%, then the yield on your savings account has been reduced to a mere 2%-and that’s before the tax hit.
Make your money work harder by investing in equities, bonds and/or mutual funds. By doing so, you can take full advantage of the power of compounding-taking a small amount of dollars and watching them multiply exponentially. A quick acid test to figure out how quickly an investment will double is through the application of the Rule of 72. How does it work? Simply, divide the number 72 by the compound annual rate (expressed as a whole number) of your investment. For example, a $10,000 investment with a compound annual rate of 8% would be worth $20,000 in nine years.
Even if you employ the services of an advisor, you should have a working knowledge of the financial markets. “You need to learn everything that you can about the investment environment as well as be sure about your own financial goals,” says Gabriele Smith, associate vice president of investments with Morgan Stanley Dean Witter in White Plains, New York. “When investors come to me, I tell them that they should know how much money they have to invest, the amount of time they need to reach their investment goal and how much risk they can tolerate.”
The key, says Smith, is time and patience. Don’t think that you are going to make a mint on the latest Internet IPO (initial public offering). It will take a methodical investment process to reach your goal-and keep losses to a minimum. To be a proactive and informed investor, do the following:
- Learn the basics. Use every tool to demystify stocks, bonds and other investments. Take courses on investing at your local college and read the