Saving money is never a bad thing, right? You take a percentage of your check each payday and put it in a savings account. You do what you’re supposed to do, don’t you?
Wellllllllll, type of. Unfortunately, saving alone will never get you into retirement. You’re on the right track, but the money you stash isn’t growing as it could be. Not even close.
Let’s see why it won’t work – and what you should do instead.
The Downside of Savings
To retire comfortably, you need to grow your money. you have to build wealth.
Saving money is all well and good, but it won’t really growing up your money. This is what investing is for.
Here’s the thing about savings: Let’s say you put your money in a savings account at a bank. According to the Federal Deposit Insurance Corporation (FDIC), the average interest rate on savings accounts is currently 0.05% APY, which is very low. Not too long ago you might have found rates above 3%, but those days are over.
And if you’re dealing with a large national chain, your rate is likely even lower. The most well-known brick-and-mortar banks often give you a measly 0.01% APY on savings accounts.
What does that mean? This means that if you deposit $100 into this savings account, you will earn one cent in interest per year.
That’s right – a penny. A penny.
Might as well put your money under your mattress for all the good it will do you.
The advantage of investing
Now, let’s say you invest that money instead.
Historically, investing in the stock market has earned an average annual return of 7%, adjusted for inflation, according to the U.S. Securities & Exchange Commission. Stock prices go up and down. But over time, they typically increase by 7% per year.
Let’s say you invest $100 in stocks. Instead of earning a penny after a year, you would earn an average of $7.
Let’s think bigger. Let’s say you saved $1,000. After a year, a savings account would earn you $1, while an investment would earn you $70.
Now let’s think a little bigger than that. Let’s say you have $10,000 in savings. After a year, a savings account would earn you $10, while an investment would earn you $700.
Do you see the difference ?
How to start investing?
If you feel like you don’t have enough money to start investing, you’re not alone. But guess what? You really don’t need much – and you can even get free shares if you know where to look.
Whether you have $5, $100 or $800 in reserve, you can start investing with Robin Hood. Investment beginners and pros alike love it because it doesn’t charge commission fees and you can buy and sell stocks for free – with no limits. Plus, it’s super easy to use.
When you download app and fund your account (it takes no more than a few minutes), Robinhood deposits a share of free shares into your account. It’s random, however, so the value of this stock may vary – it’s still a good way to help you build your investments.
There is also the chance that you can get rich.
Sure, a 7% average annual return is nice, but many investors have done much better than last year. They basically doubled their money – or more.
- At the start of 2020, an Amazon share cost $1,900. At the end of 2020, it cost $3,250.
- At the start of 2020, a Tesla share cost $96. In the end, it cost $705.
So if you want to retire comfortably — or if you want to retire at all — now’s the time to start investing.
The best time to start investing was a year ago. The second best time to start investing is now. Whether you have $5, $100 or $800 in reserve, you can start investing with Robin Hood.
Mike Brassfield ([email protected]listen)) is a lead writer for The Penny Hoarder. He’s not rich, but you better believe he’s investing.