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How to Make Your Money Work For You
At some point, everyone works hard for their money. The key to building wealth is to make your money work hard for you.
This is also called investing, one of the key pillars of personal finance.
So how do you decide what to invest in when there are so many options? There are three criteria that I like to use when evaluating potential investments:
How risky is it?
There’s no such thing as a risk free investment. But there’s a wide range among different investments in terms of how risky they really are.
For me, the key question is this: How likely are you to lose all your money? There are other forms of risk, but none as important as the worst case scenario.
A good investment has a low chance of losing everything. This is one of the key features that distinguishes investing from gambling.
How high are the potential returns?
One incredibly safe investment would be to put your money in a savings account. The problem is that the returns will be awful.
Interest rates at typical banks are well below 1% per year (and I mean well below). When you’re with an online bank like Ally, your rate (at the time I’m writing this) is less than 2%.
Those kinds of rates just aren’t going to cut it.
Historically, interest has averaged a little over two percent per year. This year it has been way more than that.
If your investment can’t beat inflation, it looks like you are getting richer when you’re actually getting poorer. Think about it: It doesn’t matter if you double your money if everything costs three times as much.
The more your investment can return per year, the better. Personally, I view a good investment as being able to return 7% per year. It’s a bit of an arbitrary standard, but that’s how much of a return you need for your money to double every 10 years:
