“A penny saved is a penny earned,” so said founding father Benjamin Franklin. Of course, these are wise words, but for those looking for future financial security, a more apt saying might be “a penny invested leads to pennies grown.”
When only saving money at current bank rates, those in the workforce now may not have the accumulated wealth to comfortably retire.
Many people have goals for which they are saving; whether it is for a rainy day or emergency fund, buying a car or home, or saving for a cozy retirement, people think saving is important and are compelled to squirrel away money. However, if people are only saving money, they might be able to achieve their short term goals of covering an unexpected expense or putting a down payment on a car, but, they are missing out on the opportunity to invest their money to gain the wealth needed for their long term goals.
It has become common knowledge a dollar earned today will not be worth as much in the future because the value of money tends to disintegrate over time. For example, if a person’s living expenses go up by 3 percent a year, and they put their savings into a bank account earning 1 percent interest on an annual basis, they will have lost buying power and find themselves at a serious disadvantage years down the road when they need those savings for income.
Conversely, if a person has put their savings into investments earning 7 percent on an average annual basis, they would not only keep up with the 3 percent inflation rate, but come out ahead of it and realize income growth.
A survey from Ally Invest found over 60 percent of people over 18 polled thought buying stock and investing in the market to be “scary or intimidating.”
The majority of younger workers are not investing at this time; this is due in large part to never learning about how to invest. According to PNC Investments, 62 percent of millennials polled reported their parents urged them to save money while only 33 percent say they were taught how to increase their wealth through investing. Not shockingly, they also discovered only a third of younger workers are secure in the knowledge they are saving enough money for the future.
People need to have a solid plan before considering which stocks to invest in to minimize risk.
Generally, people do not wake up out of the blue deciding today is the day they are going to start investing. Research and planning will help new investors feel their choices are solid. The good news is, younger people have more time until they retire, so, the stock market is actually the best place to put a large portion of their savings. The stock market, even with its historical volatility, has delivered solid returns over time.
Here is an example to illustrate the income growth potential: If a person is able to invest $500 a month, assuming a 7 percent average annual return, $240,000 of his or her own money accumulates over 40 years. Through compounding and the power of stocks, the monthly $500 investment could earn over a million dollars over the same amount of time, as opposed to a little over $60,000 in growth if the same money was saved in a bank with a 1 percent annual interest rate.
In addition to buying stocks, one should also consider investing in bonds and saving money as cash.
A well-rounded portfolio should have a portion invested in bonds. Bonds, as a rule, are much less susceptible to fluctuations in the market. At their core, bonds are loans taken out by a municipality, U.S. treasury, or corporation to be paid back in full at the end of a specified period, with interest payments usually occurring twice a year. Each type of bond has its own benefits and drawbacks.
Not all savings accounts are the same; knowing what one’s money is or is not cultivating while sitting in the bank could make a big difference in saving money over time.
Since the financial crisis of 2008, interest rates have remained abysmally low. With many banks offering a mere .01 percent annual interest rate, it is possible to find savings options paying as much as 2 percent. While that is still far below the attractive interest rates of years ago, it is a significant difference. People with money in the bank should also be aware of fees, even on savings accounts. It is not unusual for banks to charge fees for moving money through an ATM or charging fees for inactivity, which could not only eat up the paltry interest income gained, but, it digs into the original deposit.
The bottom line is, most people cannot put their entire savings dollars in the bank and hope to retire comfortably. By investing in the stock market, one can realize long term income potential. In addition to buying stocks, smart investors’ portfolios contain different types of investments including bonds.
Of course, it never hurts to have some money stashed in the bank, just in case.
For information on investing in stocks online, please, see How to Trade Stocks Online.