Starting a business can be very rewarding, but it involves a high level of risk. You might make a lot of money, or you could lose your entire investment. Keeping your money in a bank account is low risk, but the returns are limited to the interest rate offered by the bank.
Start a High-Yield Savings Account
Even with limited funds, Judy opens a high-yield savings account with an annual interest rate of 2%. She decided to take the “extra” $200 per month she’s receiving in her financial aid packet and place it in this account to start earning some interest on her savings. She sets up automatic transfers from a checking account to help her save consistently.
Baby Steps
She’ll have approximately $2,400 in her savings account after one year, earning around $48 in interest, which is approximately how long her certificate program will last (two semesters).
So, when you’re investing, you need to consider how much risk you’re comfortable with and what level of returns you’re aiming for. It’s all about finding the right balance between risk and potential reward that aligns with your financial goals and comfort level. Spreading your investments across various asset classes (stocks, bonds, real estate, etc.) can help mitigate risk.
Start a Small Business
Running a small business can be a fantastic way to generate income and potentially see its value grow over time, contributing to your overall financial well-being.
While she was still in school, Judy decided to put her newfound photography skills to good use. She began showcasing her work on social media, covering local community street fairs, capturing moments at friends’ birthday parties, and even documenting her sister’s wedding. Her passion and dedication led her to create a professional photography website.
It didn’t take long before Judy started attracting clients. Local vendors even hired her to spotlight their products at upcoming fairs for marketing purposes. By the end of her first semester, Judy had a bustling summer lined up with weekend gigs. These opportunities not only helped stabilize her income but also set the stage for her to thrive in the world of photography.
Establish an Emergency Fund for the Business
Judy decided to set a goal to build an emergency fund for her business to cover unexpected expenses.
She aims to save $20,000 in a separate business savings account within the next three years
Saving for Retirement
Judy starts with an initial investment of $1,000, and an annual interest rate is 5%. In the first year, she earns $50 (5% of $1,000), bringing her total to $1,050. In the second year, her interest is calculated on the new total ($1,050), earning her $52.50. This process continues, with each year’s interest calculated on the previous year’s total. Over time, her money compounds, and her wealth grows substantially.
As Judy’s financial situation improves, she can start investing in a diversified portfolio of stocks and bonds, even if it’s a small amount initially. Over the long term, this can help her build wealth.
Invest Business Profits in a Diverse Portfolio
She decides to invest a portion of her business profits into a diversified investment portfolio. Her aim is to grow these investments steadily over the next five years.
Entry Into Investing
Judy decides to invest 20% of her business profits into a mix of low-cost index funds and bonds, gradually increasing her investment amount as her income grows, with a focus on long-term growth.
Judy knew that a solid understanding of financial principles can help individuals make informed financial decisions and work toward their financial goals. So, she took a class to help her learn the steps.
Read the next section to find out what she learned…,