I often hear women in their 20s and early 30s say that they do not have enough money to start investing. I don’t believe it! I believe everyone has enough money to start investing if they make it a priority. Unfortunately, many young women don’t make investing a priority because they fail to understand how investing can help them in the long run.
Investing in the stock market allows you to potentially grow your money at a higher rate than in a savings account. Consequently, over time you’ll have a lot more money for your various financial goals. This is because compound interest will be working in your favor.
The best way to understand how compound interest works is to learn the “Rule of 72.” The Rule of 72* is a financial rule of thumb that tells us how many years it will take to double our money, given a specific interest rate. For example, if you have $10,000 and want to know how long it will take to double your money at a 2 percent interest rate, divide 72 by 2 and you get 36 years. If you take the same $10,000 and instead use an 8 percent interest rate, it will take nine years to double your money: 72 divided by 8 equals 9. I don’t know about you, but I prefer nine years over 36 years! The more time you have to grow your money, the less money you need, because compound interest will be hard at work for you.
You may be wondering where you can get an 8 percent return. Well, that’s where investing comes in. There are many types of investments you can choose from: stocks, bonds, real estate, Treasury bills, etc. I will explain the different types of investments in my next article, “Investing 101 (Part 2),” so for now, let’s look at investing in stocks.
In the United States, there are major stock market indices, one of which is the Standard & Poor’s 500 index. This is a capitalization-weighted index of 500 widely traded stocks. In regular words, when you invest in the S&P 500, you are buying in to 500 stocks from the largest companies in this country. Historically, the S&P 500 has had an annualized average rate of return of 12.05 percent (between 1914 and 2014).**
You could invest $50 per month into the S&P 500 over the next 30 years, and potentially grow your money from $18,000 to $146,209.69! If, instead, you just put the $50 per month into your savings account, earning 1 percent a year (at most), you could potentially grow your money to $20,870.93.***
That’s a huge difference! Which do you prefer?
Of course, investing in the stock market does involve more risk, including the potential loss of your principal investment. Therefore, do your homework to make sure you understand the ins and outs of investing. Remember, even if you only have $50 to invest per month, by starting now you will have more time to allow compound interest to work in your favor. I challenge you to find the $50 in your monthly spending plan and start investing now.
Check back next month for “Investing 101 (Part 2)”; I’ll explain the various types of investments, as well as what you need to do to start investing in the stock market.
Brittney Castro is a member of the DailyWorth Connect program. Read more about the program here.
*The Rule of 72 is a mathematical concept and does not guarantee investment results nor does it function as a predictor of how an investment will perform. It is an approximation of the impact of a targeted rate of return. Investments are subject to fluctuating returns and there is no assurance that any investment will double in value. This is a hypothetical example and is not representative of any specific situation. Your results will vary. The hypothetical rates of returns used do not reflect the deduction of fees and charges inherent to investing.The S&P 500 is an unmanaged index and cannot be invested into directly. Past performance is no guarantee of future results.
** Compound Annual Growth Rate (Annualized Return): http://www.moneychimp.com/features/market_cagr.htm
*** $600 a year for 30 years equals $18,000. $600 invested per year at 12.05 percent annual rate of return for 30 years equals $146,209.69. $600 invested per year at 1 percent annual rate of return for 30 years equals $20,870.93.