If you have a steady job or some extra cash lying around, the sound thing to do is invest it. People too often think of investing as a get rich quick scheme for people with money to invest. The truth of the matter is that long term investments pay off far more than short term investments do. For that reason, it is wise to start thinking about all of your investments from a long term point of view.
Think about buying a new or used car. At the time, you may have the money to buy a new car and because of that think that buying is absolutely the best option. Five years down the road, your new car may only be worth two thousand dollars more than a comparable used one that you could have bought for $10,000 less than the new one. The short term joy of owning a new car can be a very bad long term investment.
Now, let’s look at investing in a house. If you are not planning to live in a house for a long period of time, it may be better to lease a place. Let’s say you go out and buy a small home for $220,000. Five years later you are married and planning to move to start a family. Unfortunately for you, the real estate business is slow and you can only get $150,000 for your house. Between that $70,000 you lost and all of the property taxes and interest you paid over the years, you may have $100,000 less to spend on the house that you want to raise your family in than you would have if you had been leasing a place for those five years.
One of the most underfunded investments today is a retirement fund. Someone who invests $2,000 per year in a retirement fund starting at age 25 will have about $500,000 in their account from deposits and earnings by the time they turn 65. Someone who invests the same amount per year at the same interest rate starting at age 35 will only have about $250,000 when they turn 65. The 25 year old is spending an extra $20,000 over a ten year period to earn an extra quarter of a million dollars. No matter what short term investments you make over those ten years with the 20 thousand dollars, it is very unlikely that you will earn near that much.
Thinking about investments from the long term point of view does not only apply to major purchases like a house or car, the concept applies to smaller things as well. Let’s say you are buying a new laptop. You can get a great laptop for $1400 that will last you an estimated seven years. You can also get an average laptop for $600 that will last you about three years. Overall, you are paying $200 per year to own a working laptop, no matter which one it is that you choose. The difference is that by investing for the long term, you will get to use a much better laptop for seven years than you would if you saved money for the short term.
Owning a car (or two or three) is one of the bigger financial decisions most people will make. While many wouldn’t consider a car an investment since they depreciate in value, owning a car still requires the use of money that could otherwise be invested. And it goes beyond just the purchase price of the car because you will have recurring insurance costs for the life of the vehicle. Most people choose one company to get their car insurance from and stick with it as long as their are no major problems. This means that people often use the same car insurance company for multiple cars that they own for decades of their life. Instead of using the car insurance you began with, you should look into other comparable policies that you may be able to get for much cheaper. It is not surprising for someone who does a little research to find out that they can save $500 per year on their car insurance policy by switching their coverage. Over the course of a driver’s lifetime, they may end up saving $20,000 or more by making sure they have the best policy. What would you invest that savings in? Make sure to visit cheapcarinsurance.net to check if you can find a better policy than the one you currently have. Saving a little money today can open up investment doors for the future.
Author: Jeremy Vohwinkle
My name is Jeremy Vohwinkle, and I’ve spent a number of years working in the finance industry providing financial advice to regular investors and those participating in employer-sponsored retirement plans.