Despite growing up with a financial planner for a father, the idea of investing intimidated me well into my adulthood. From my point of view, investing seemed like a mysterious process. Not only was this magical money-making exercise conducted in an arcane language (what exactly is a NASDAQ, and why does it sound like something you treat with a special cream?), but it also required my dad to keep the TV in his office tuned to the world’s most mind-numbing broadcast, even though cartoons were just a channel away.
It’s no wonder I grew up thinking that investing was boring and impossible to understand. And investment ambivalence is pretty common. A recent NerdWallet financial angst report found that 79% of Americans feel intimidated by at least one financial topic, and 30% of those surveyed named investing as the most daunting one of all.
But investing is a crucial part of money management. If you don’t invest your money, you’re committing yourself to working for every dollar, rather than letting your money do the heavy lifting.
The good news is that investing isn’t as incomprehensible or boring as you might believe. Here’s what you need to know to make investing part of your financial life.
Why investing is important
If you type the words “compound interest” into Google, you’re likely to come across the following quote, falsely attributed to Albert Einstein: “Compound interest is the eighth wonder of the world. He who understands it, earns it . . . he who doesn’t, pays it.”
Incorrect attribution aside, whoever put these words in Einstein’s mouth was onto something. Compound interest is an incredible economic force that you can use to build wealth.
Here’s how it works: When you invest, the money you have invested earns interest. But that interest compounds periodically, meaning that the interest you have earned is added to your principal, and you then start to earn interest on both your original investment and on the interest you’ve earned, until it compounds again.
