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5 Reasons You Need to Start Investing – Now
Every family has big financial goals. Two very common ones are: saving to provide a college education for our children without them going into debt; and positioning ourselves for a comfortable retirement in the future.
Here are five reasons why investing, and starting sooner rather than later, is the best way to achieve your financial targets for these worthy priorities.
- Investing provides the best returns on your money
We get 1.05% interest on our savings account right now. If you are only getting the nationwide average of .12% then you should shop around. We keep our savings at Ally Bank and have been happy with them.
Earning 1% on your money isn’t much though. In fact, inflation tracks around 2% per year, so holding your money in a savings account means you are actually losing money! The purchasing power of that savings in the future will be a lot lower so you should find a way to earn at least 2% – just to break even.
Did you know that the historical average return on the stock market (specifically the S&P 500 Index) is right around 10% per year? Even looking at the past 20 years – which saw the dot-com crash and the housing market meltdown – investors experienced about 8.5% per year of growth on their investments.
- Time works for you
The beautiful thing above investing over a long timeframe – like the 18 years until college, or perhaps 30 years until retirement – is that the returns compound.
“Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t … pays it.” – Albert Einstein
At a 10% return your $100 will gain $10 and be worth $110 the next year. Then you earn again on the higher balance, adding $11 to bring the total to $121 that following year.
In fact, there is something called the rule of 72 that I find helpful understanding the power of compounding. In short it tells us that if you can earn 7.2% your money will double every ten years. Conversely if you can earn 10% your money will double every 7.2 years.
If you invest just $100 and never add to it (you SHOULD add to it though), and earn an average of 10% per year, the balance will grow to $200 in 7 years, then $400 in 7 more, and $800 seven years after that. So just twenty-one years later your money has grown 8-fold! Think of the potential if you were to invest $100 each and every month!
- A longer investing timeline lowers risk
The longer your investing timeline, the better your chances are for great returns.
The stock market has cycles. That is normal and expected. It goes up, and down, but trends upward over long periods of time.
When you are investing in the stock market you should definitely think long term. If you need the money back within just a couple of years – don’t invest it. But if your goal is at least 5 years away, or even 10 or 20, then investing makes great sense.
A lot of people don’t realize this, but there has never been a 20-year period of time where someone invested in the stock market has lost money. Seriously. Even someone who had to take out money in the middle of the 2009 housing crisis would have had positive returns if they originally invested that money twenty years ago.
Time is your friend. Not only does compounding provide tremendous results, but it also lowers risk. That’s why it is important to start now. Don’t wait until you’re close to a goal date and realize you are behind on the savings target. Start now and let the market work in your favor.
- Investing has tax advantages
When you earn 1% on your savings account that money is taxed as regular income. If you are in the 25% federal income tax bracket, that means your paying one fourth of that money back out in taxes!
Investment gains have preferential tax treatment though. As long as you hold the investments at least a year (and you WILL, right? Re-read points 2 & 3 if needed) then your investment growth is considered long-term capital gains.
Capital gains are taxed very differently from regular income.
Assuming still that you are in the 25% federal income tax bracket, your tax on long-term capital gains is only 15%. And guess what? If you are in the 15% federal tax bracket ($75,900 for a married couple) then your long-term capital gains tax rate is 0%! Yes – ZERO.
I don’t know about you, but I prefer to pay as little in taxes as legally possible. Growing your money through long-term investing is a great help toward that goal.
- Investing is low-cost and super-simple
It used to be that you needed to do a lot of research before investing in the stock market. You once needed to understand terms like “volatility”, “diversification”, and “price-to-earnings ratios”. Feel free to still learn those terms if you want but it certainly isn’t necessary to be a smart investor anymore.
There are great modern-day service options available that make investing easy for everyone. My favorite – and one my wife and I personally use – is Betterment. You can read my Betterment review here.
With Betterment and similar services you just specify how much you want to invest, and how often, and they handle all the rest! What you wind up with is a diversified portfolio that matches your risk tolerance. The best thing: You don’t even need to understand what that means because they take care of it for you!
It’s also possible to set up an automatic investing process with Betterment. Say you want to invest $100/month (or $50, or even $500!) each and every month. That is very easy to set up and once done you never need to worry about it again. It will just happen automatically without any effort on our part. That’s why I believe Betterment is the best way to consistently invest small amounts of money.
The best time to get started with investing is sooner rather than later. Time will in your favor to compound your returns and lower your risk.
Bio: Brad Kingsley is a Personal Finance Blogger and Certified Financial Coach. His mission is to help people create a plan for their finances – to accomplish big goals like becoming debt free, paying for college, or preparing for a comfortable retirement. You can visit his site over at https://MaximizeYourMoney.com.
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