Saving money is never a bad thing, right? You take a percentage of your check every payday and tuck it away in a savings account. You’re doing what you’re supposed to, right?
Wellllllllll, kind of. Unfortunately, saving alone will never get you to retirement. You’re on the right track, but the money you’re stashing away isn’t growing like it could be. Not even close.
Let’s take a look at why this won’t work — and what you should do instead.
The Downside of Saving
To retire comfortably, you need to grow your money. You need to build wealth.
Saving money is all well and good, but it won’t really grow your money. That’s 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 super low. Not that long ago, you could have found rates upwards of 3%, but those days are over.
And if you bank with a big national chain, your rate is probably even lower. The best-known brick-and-mortar banks often give you a measly 0.01% APY on savings accounts.
What does that mean? It means that if you deposit $100 into that savings account, you’ll earn one cent of interest per year.
That’s right — a penny. A penny.
You may as well shove your money under your mattress for all the good that’ll do you.
The Benefit of Investing
Now, let’s say you invest that money, instead.
Historically, investing in the stock market has yielded 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 generally rise by 7% a year.
Let’s say you invest $100 in stocks. Instead of earning a penny after a year, you’d earn an average of $7.
Let’s think bigger. Let’s say you’ve got $1,000 saved up. After a year, a savings account would earn you $1, while investing would earn you $70.
Now let’s think a little bigger than that. Let’s say you’ve got $10,000 in savings. After a year, a savings account would earn you $10, while investing would earn you $700.
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 that much — and you can even get free stocks (worth up to $200!) if you know where to look.
Whether you’ve got $5, $100 or $800 to spare, you can start investing with Robinhood. Both investing beginners and pros love it because it doesn’t charge commission fees, and you can buy and sell stocks for free — no limits. Plus, it’s super easy to use.
When you download the app and fund your account (it takes no more than a few minutes), Robinhood drops a share of free stock into your account. It’s random, though, so that stock could be worth anywhere from $2.50 to $200 — a nice boost to help you build your investments.
There’s also the chance you could strike it rich.
Sure, an average annual return of 7% is nice, but a lot of investors did a lot better than that last year. They basically doubled their money — or more.
- At the beginning of 2020, a share of Amazon stock cost $1,900. At the end of 2020, it cost $3,250.
- At the beginning of 2020, a share of Tesla stock cost $96. At the end it cost $705.
So, if you want to retire comfortably — or if you want to retire at all — it’s time to start investing.
The best time to start investing was a year ago. The second best time to start investing is right now. Whether you’ve got $5, $100 or $800 to spare, you can start investing with Robinhood.
Mike Brassfield ([email protected]) is a senior writer at The Penny Hoarder. He’s not rich, but you better believe he invests.