Investing your money to allow it to grow so that it will eventually support your dreams and secure your financial future is an excellent option. Smart investors use their money and the dividends it can earn to accrue greater financial returns by investing for a greater length of time. If you have been considering the various investment options, you may be wondering why putting your money into unit or investment trusts or into shares offers a better return than leaving it in a normal savings account with a bank. Here are just a few of the advantages.
Make your money work for you
Investing money successfully involves making it grow over time and includes activities such as buying stocks or shares directly or in a managed fund, while saving is a basic solution tied to bank accounts where annual interest is added and compound growth is relied upon to increase the capital on deposit. The returns from investment can be high, generating income in the form of dividends or growth in the value of the asset held. In contrast, savings are unlikely to deliver comparable returns but of course the risk of losing some or all of the money is removed.
Beat inflation, grow aggressively
Buying into investment products such as stocks, bonds and funds will enable you to build a diverse portfolio capable of beating the steady rise in inflation. They will increase your purchasing power compared to savings accounts which can lose you money when inflation is taken into account. These products also offer liquidity, enabling you to convert them into cash at short notice. Investment is generally a better option for the long term as it presents the opportunity to grow your money more aggressively.
Finance expert Chris Hogan stated: “So if someone’s beginning with investing, I would encourage them to really look at growth-stock mutual funds as a great starter way to get your foot in. And really start to understand what’s going on and how money can grow.”
Tap into the magic of compound interest
The primary benefit of reinvesting income from previous savvy investment decision making is to buy into more shares, which feeds into the process of compounding. Compounding involves the reinvestment of an asset’s earnings to drive more earnings over a set period. Experienced market watchers believe reinvesting dividends and benefitting from the “compounding effect” is the key to financial success.
“Dividends really do matter,” Fidelity International’s Maike Currie says. “While they are obviously attractive to someone in need of a steady income, to really get the most out of income-paying stocks you need to re-invest your dividends. The answer to understanding why ploughing back any dividends can be so powerful lies in the magic of compounding.”
Currie says compound interest was once labelled the “eighth wonder” of the modern world by Albert Einstein and only requires your time and reinvestment to work its magic. He adds that a proactive approach to reinvesting income and a commitment to long-term gains can take investment returns to the next level.
This sentiment is supported by case studies comparing simple savings to dividend reinvestment. If you decide to invest £100 every month in the London Stock Exchange’s capitalisation-weighted index, which features around 600 companies, for ten years, you can expect to see total savings of just over £15,600 at the end of that time. However, if you had opted to reinvest the income return instead, you would have seen that portfolio grow to almost £19,000.
The potential for returns continues on a steady upward curve as the amount of investment time increases. For example, if you had increased the period of investment in the previous case study to 20 years, you would see an even greater difference between the “simple saving” pot and reinvestment. In various scenarios, your savings are being supercharged by the simple process of reinvestment.
How to reinvest your money
Now that you understand the benefits of reinvestment, you can start looking at ways to make your income earn even more money. Investing in shares directly is an option and you should be able to buy into an automatic dividend reinvestment (ADR) plan which will reinvest your dividends automatically. This is a viable option if you want to streamline the process as you won’t have to use cash to purchase any shares personally. Talking to a financial advice expert is recommended if you want to run the rule over all the investment options available to you.
A second option with potential for greater financial gains is to speculate on the rise and fall of financial markets through contract for difference (CFD) derivative trading. The Plus 500 reviews service will empower you to select a complete and intuitive platform from which to analyse data and trade CFDs on the forex markets, stocks, digital cryptocurrencies and more.
Investors are always finding new and lucrative ways to reinvest money and if you start working with brokerage today, you can also start realising the power of appreciation, compounding and long-term gains to support your lifestyle, goals and objectives.