- Putting your money in a savings account might seem risk-free, but you’re likely to actually lose purchasing power to inflation over the long term.
- Investing gives your money the chance to grow over time, and there are many options that can help you invest in a way that works for your goals and your risk tolerance.
- The increased competition in the investment market is good news for you: You can invest your money with far lower fees than you’d expect, which helps you keep more of your money.
When you’re saving up for a big goal, no matter what it is, it’s tempting to stop there: save your money, and don’t worry about investing.
But over time, especially when that time is measured in years, the returns you’ll get from investing your money may outpace the interest you’d earn if you left your money in a savings account.
The faster your money grows, the faster you’ll hit your goals.
So why don’t more people invest their savings for longer-term goals? There are some big misconceptions out there about investing, so we wanted to break them down for you.
Specifically, we’re going to look at:
- Can you actually lose money by sticking with a savings account?
- How different kinds of investments come with different amounts of risk—and how you can find the right balance for you
- How you can invest without it costing you an arm and a leg
Can You Lose Money in a Savings Account?
Here’s a quick look at how inflation can wreck the best-laid savings plans:
Let’s say that ten years ago, you set a goal to save up $10,000 for a dream vacation.
This year, you’ve finally saved up the cash, but when you go to buy plane tickets, you realize they’re more expensive than you had planned—as is the rest of your trip.
That’s because over the past ten years, inflation happened.
Prices went up, and according to the Department of Labor’s inflation calculator, the $10,000 vacation you planned will now cost you $11,509. Thanks, inflation.
That’s why it’s so important to earn interest on your savings, and it’s how you can essentially lose money in a savings account even when the balance keeps going up.
You need to make sure that your money is earning enough in interest to at the very least keep up with inflation, and it’s very rare to find a savings account that pays that much interest.
Which is where the stock market comes in.
Historically, the S&P 500 (an index that tracks the biggest 500 stocks in the US, but more on that in a future lesson!) has returned 9.65% annually on average since 1928.
Investing in the stock market is the best way to make sure you’re staying ahead of inflation, and not losing purchasing power in a savings account.
There’s More Than One Way to Invest Your Money
But investing in stocks does come with some risks, and a 9.65% average annual return in the past doesn’t mean you’re guaranteed to earn 9.65% in the future.
The good news is, there are many other ways you can invest your money that balance your risks with your returns.
For example, the historical annualized return of a 10-year treasury bond (an investment backed by the US government, and generally considered to be almost risk-free) is 4.88%.
That’s nothing to sneeze at, and much higher than you see on savings accounts, with less volatility than the stock market.
That’s how most investments work: there’s a trade-off between the amount of risk you’re willing to take, and the returns you’re going to earn.
Generally speaking, if you’re comfortable with more risk, you have a chance to earn higher returns over time, but you don’t have to take a lot of risk to invest your money.
You can choose a balance of low- and high-risk options to create a balanced portfolio, or create an overall low-risk portfolio if that fits your goals and your comfort level.
And that might seem complicated when you’re just getting started, but there are lots of options that make it easy for everyone to do—and they’re more affordable than ever.
Investing Doesn’t Have to Cost an Arm and a Leg
While the words “investment portfolio” might conjure up images of swanky offices and thousand-dollar suits, you can invest these days for a fraction of what you’d expect.
Investments are typically priced on a percentage basis, called a management expense ratio (MER).
Many mutual funds and managed investments will charge 1%, 2%, or even more to build you a portfolio that fits with your goals, meaning that every year, they will take that percentage of your invested funds as a fee.
But these days, you can find comparable options for far less than 1%.
In fact, some exchange-traded funds (ETFs) and index funds will charge you less than 0.1%.
That’s great, because here’s a quick primer on ETFs and index funds. Both of them are a single investment (simple!) that give you exposure to hundreds of stocks or bonds all at once for a fraction of a percent.
Many of the world’s best investors and economists agree that investing with low-cost ETFs that expose you to a wide range of investments is one of the best ways to invest your money.
And as a bonus, apps like Twine make it easy to invest in them from the comfort of your couch.
Investing 101: Let’s do this
Investing doesn’t have to be something scary and intimidating, and it’s one of the most powerful ways you can hit your goals and build wealth over the long term.
Make a Plan:
- Should I Save or Invest?
- Understanding the Stock Market
- Long-Term Investing
- The Relationship Between Risk and Return
- Investing for Beginners
- The Benefits of Diversifying Your Investments
- Types of Asset Classes
- 5 Common Investing Mistakes