Saving money is important. Having a diligent savings habit helps you reach your goals, get the things you want, and feel secure.
Most people, even ones who aren’t “natural savers”, know the importance of saving money. Having a money cushion to assist you in times of emergency or a pop-up expense can be a lifesaver.
The advantages of saving money are plentiful. In short, it helps you reach your goals and afford the big-ticket items like a house or car. A consistent savings habit is one of the key skills to master towards becoming financially savvy.
If you’ve done your homework on the best savings accounts, you’ve probably been able to find one with an interest rate of around 1%. This is a pretty good rate for having your money be readily accessible.
However, you don’t build wealth by leaving your money sitting in a savings account. Investing is one of the key ways towards building wealth and reaching financial independence. It allows you to grow your money in a way a savings account can’t match.
The stock market has had a 7% average rate of return over the long run (or even in the 8% to 12%, depending on who you ask and what year range you use). When you compare that to the 1% rate of return even the best savings accounts offer, you start to see why it pays to invest your money.
Despite the higher rate of return, over the long run, many people still don’t feel confident with investing and putting their money in the stock market. Only 33% of Millennials own a stock according to a study by Bankrate.
The top reasons people don’t invest include not knowing a lot about the stock market and thinking it’s too risky. Leaving money in a savings account is usually deemed as the “safe” option.
With many millennials growing up around the time of the 2008 economic crash, it can be easy to see why so many fear the stock market. We live on small salaries, have big student loan payments, and deal with high costs of living. The stock market looks risky and we don’t want to lose the little money we have.
Although when you compare the rates of return between a savings account and investing in the stock market, you see the high cost of not investing.
The Difference between Saving and Investing
Let’s lay out some numbers to illustrate the difference between keeping your money in savings vs. investing it. If you have a savings account with a $5,000 balance and 1% interest rate, that means after one year, your savings will grow by $50 to a balance of $5,050. After 10 years, that balance will grow to $5,500, assuming no ongoing deposits. Not bad for a savings account.
That is until you consider the difference if you were to invest that money. If you put $5,000 into an investment vehicle like a Roth IRA, then after 10 years, assuming a 7% rate of return, your savings will have grown to $9,836. Compound interest can be really amazing.
Which one is more appealing to you? $5,500 or $9,836? Savings accounts can be great but when you compare the numbers you start to see how keeping your money in savings isn’t as safe as realized. You end up losing buying power with your money due to inflation. It pays to invest.
Despite the higher returns the stock market offers, there are reasons for keeping more of your money in savings. Maybe you have debt you’re currently paying down or you’re saving up for a full sized emergency fund. Keeping your money in a savings account and readily accessible can be the route to go for these types of goals.
If you want to grow your money? Investing is the way to go. Admittedly, the stock market can be confusing to newcomers. The stock market is complex and there are a plethora of ways to invest. It can be intimidating for a beginner.
Luckily, it is relatively simple to get started investing in the stock market. The biggest component is time. The more time you have, the better off you are at growing your money.
How To Get Started
Getting started is often the hardest part. Investing for millennials doesn’t have to be complicated. You don’t need a large sum of money to get started. There are online brokerages that let you get started investing for as low as $10.
See if you’re offered a 401(k) plan through your employer. This is usually the first way to get started investing. Have a portion of your paycheck diverted into your 401(k) plan. If your employer offers a matching contribution, then contribute up to the match.
If you don’t have access to a 401(k) plan through your employer, then consider opening up an IRA (individual retirement account). IRAs are great even if you have a 401(k). Set up automatic contributions to be deposited into the account. Setting up automatic contributions, whatever the amount, let’s you have a more set it and forget it passive investing approach. You get peace of mind knowing you’re contributing but not having to worry about managing and remembering deposits constantly.
Even if you don’t have a lot to spare, just get started. Saving $50 a month into an IRA or putting 3% of your paycheck into a 401(k) is better than nothing. Starting earlier rather than later means your money has more time to grow.
Investing your money for something like retirement, which is decades down the line for most millennials, can feel weird. Think of it this way: the money you make from your investment returns is money you won’t have to make from working a job.
You could retire sooner and be financially independent. All it takes is getting started and making consistent contributions to your investment accounts.
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When did you start investing? How did you get started?