The joys of compounding don’t end there. For one thing, if you have a certain goal in mind (say, you plan to buy a house in 10 years and figure you’ll need $20,000 for the down payment), compounding lets you figure out how much you’ll need to set aside on a regular basis and what sort of return you’ll need to reach your goal. In the preceding example, if you’ve got 10 years to invest and assume that you can earn 10% a year (not an unreasonable assumption), then all you need to do is set aside about $96 a month to achieve your targeted down payment goal. (more…)

Once you know how much money you need to meet your goals, you then have to think about where to invest it. To make that decision, you need to understand the different risk factors. Also, you should consider each investment’s potential for income and growth as well as its liquidity. You should evaluate the overall risk factor of making investment by examining five different components of risk: inflation risk, interest rate risk, business failure risk, financial market risk, and global company risk. Not only this will saving extra money, but the decision of investment is for long term investment only. (more…)