Building wealth isn’t as simple as putting money in a savings account. The bank may keep your money safe, but inflation devalues every dollar every year. You can beat inflation and build wealth over time by investing some of that money. Here’s how.
Well, it can’t do its job hiding in a bank account. Whether you want to save for your child’s college or prepare for retirement, you’ll reach your goal faster by investing. Here’s everything you need to know about how to start investing today.
When you invest, you buy something with the expectation of earning a return in the future.
Traditional investing involves things like owning a business, owning real estate, or lending money to a person or company in exchange for interest payments.
Yesterday. But if you haven’t started yet, today is a great second option.
In general, you should start investing as soon as you have a solid financial foundation. This includes not having high-interest debt, having an emergency fund, and having a goal for your investments in mind. This allows you to keep your money invested for the long term—the key to maximum growth—and be confident in your investment choices through the natural ups and downs of the market.
Compound growth takes time. The earlier you start investing, the more wealth you can create with less.
When it comes to investing, time is your most powerful tool. The longer you invest your money, the longer it has to work to create more money and reap the benefits of compound growth. It also greatly reduces the likelihood that one sharp market downturn will negatively impact your wealth, since you’ll have time to keep your money invested and regain its value.
Let's look at an example:
Since 1928, the average return of the S&P 500 (a set of 500 of the largest publicly traded U.S. companies that is often used to approximate the stock market) has been around 10%.
So let's say you're 25 years old and you invest $5,000 in the S&P 500. You see a 10% increase in value each year, allowing your money to continue to grow. When you turn 65, you open your account and find that you have over $226,000. What a great retirement gift!
However, if you had waited until age 35 to start investing, your net worth at age 65 would only be $87,000. Still impressive, but less than half of what you would have had if you had started a decade earlier.
View paying down high-interest debt as investing until you no longer have those debts. Every dollar toward principal earns you an instant return by eliminating future interest cost.
If you still have high-interest debt, such as credit cards or personal loans, you should hold off on investing. Your money works harder for you by eliminating that pesky interest expense than it does in the market. This is because paying off $1 of debt balance saves you 12%, 14%, or more in future interest expense. More than traditional investments can be expected to return.
Focus on getting out of debt as fast as you can, then dive into investing.
To reduce the risk of having to pull money out of your investments early, have an emergency fund to protect from life’s unexpected twists and turns.
Remember how we said time is the most powerful tool? To start investing, you have to be set up to let that money stay invested. Otherwise, you limit your time horizon and could force yourself to withdraw your money at the wrong time.
To protect yourself from unexpected expenses or job layoffs, save a sufficient emergency fund for your needs. Do not plan for your investment accounts to be a regular source of cash.
Sometimes people think they can’t start investing until they have a significant amount of money. But this means many people give up years of compound growth waiting until they feel rich enough. No matter how small, get your money working for you as soon as possible.
Consider our previous example of the $5,000 invested at 25- or 35-years-old. Pretend for a moment the 35-year-old didn’t have $5,000 to invest at age 25, but she did have $500. And she thought, maybe, she could scrape together $50 a month to add to her $500 investment.
If she invested $500 at age 25, and then $50 a month until she had put away a total of $5,000, she would have almost $174,000 at retirement age. That is double what she would have had if she waited until she had $5,000 at age 35.
Starting small makes a significant difference, especially if it means you get in the market sooner.
