First off, if you don’t know what I mean when I say “investing”, check out What is investing? and then come back.
All good? Okay.
Instead of jumping into why you should invest, maybe we should address some reasons people have for not investing.
1. It seems hard
Many things seem hard or confusing before you try them. Algebra is mysterious and complicated until you learn the basics of math that make it work. Foreign languages are nonsense until you learn the vocabulary and sentence structure. Investing is the same. Also, there’s no rule that says you have to become an investing genius. You just need to know enough to understand where you are putting your money, what it is doing there, and when you plan to take it out.
2. It sounds risky
I like to think of investing like skydiving. It’s a lot of fun, but there are many different levels of risk. Some people like to throw their money into risky situations, chasing the thrill of the big win but always risking the big fall. These are the base jumpers of the investing world. (Seriously, base jumping is crazy.)
Some people like to take some bigger risks, but in a more controlled and planned way. These are the people who skydive, and invest, solo.
Most of us, however, prefer tandem skydiving. This way, we can enjoy the thrill while firmly strapped to someone who knows the ropes and won’t let us get out of control. Investing with the help of a financial planner or at least some guidance from a broker is the best choice for many of us, and that’s okay.
The one thing we can’t do, however, is just sit on the ground and watch others jump out of planes. It sounds super safe, but you end up missing out on a huge opportunity, and will probably regret it later when everyone else is reaping the rewards.
Long analogy short, investing will never be completely without risk, but neither is life, and there are plenty of ways to minimize your risk and still invest.
3. I’m not rich
Investing is so tied to the idea of wealth in our culture that it’s tempting to to think that the ONLY people who can invest are those who already have oodles of money, which is simply not true, especially today. The internet has made it incredibly easy for anyone to invest.
Many brokerages allow you to open investment accounts with small amounts, and there are several apps that are designed to allow people to easily set aside little chunks of money to invest. We won’t get into them in this post, but for now, know that they exist and being wealthy already is absolutely not a requirement to be able to invest.
4. I don’t understand business
If you want to work on Wall Street or in business management, a business or finance degree will definitely help you out. But if you’re just investing for yourself, there’s no degree required.
You should still educate yourself on how to invest and what investments might be best for your situation and values, but modern investment tools and financial planners exist so that you DON’T have to be an expert. It’s important to be aware of what’s going on with your money, but you don’t have to invest alone.
But can’t I just use a savings account?
Having a savings account is important, but it’s not enough on its own. At some point, you’re going to have to invest.
I know it’s hard to think about spending $100 today on something you won’t get to enjoy for years, maybe decades. It’s the ultimate delayed gratification. However, as hard as it can be to set aside that money now, it’s pretty much the only way the average person making an average salary can hope to become a millionaire. Given enough time and a little luck, the $100 could turn into $500 or more down the line.
Still need convincing?
Let’s look at the math!
The most recent U.S. Census Bureau data shows that the average household income in the United States in 2014 was $65,751. This includes both one- and two-income households. Let’s imagine you make exactly that amount. A very nice salary for a single person. (I’m going to ignore taxes for the sake of this math problem, FYI.)
According to the U.S Bureau of Economic Analysis, the average person saves about 5.7% of his or her income, which works out to about $3,748 a year for someone making the average household income.
If you socked that much away in a savings account every year for 30 years and got an average of 1.5% interest compounded monthly, you’d have saved about $147,767. Note that this interest rate is higher than you can get now, but may be lower than what you can get in the future.
Pssst. Did your eyes glaze over during that last paragraph? Need a refresher on compound interest? Hop on over to What is Compound Interest?
A six-digit bank account number is awesome, right? Except most people need from $800,000 to $1 million to retire comfortably today, and because of inflation it will probably be more by the time you’re old enough to retire.
Yeah, sorry to burst that bubble.
Of course, you might be able to save more than $3,748 a year, especially because you probably won’t make the same amount of money every year for 30 years, but where does a lot of the other $700,000 come from?
Say you invested that same amount every year for 30 years and assume a reasonable 5% return. You’d end up with almost $250,000 in that account alone, according to the EdwardJones.com Investment Calculator.
Sounds good, right? A healthy combination of saving and investing will make retired-you very happy.
There are many ways to invest, and everyone’s investing style is a little different, but unless you plan to live as a hermit in the woods, you’re going to have to do it. No excuses.
Ready to start saving up to invest? Find out which of the four kinds of savers you are to help you get started!