Investing is an essential part of everyone’s financial plan. Unfortunately, many people don’t invest their savings, preferring isntead to keep a majority of it in a low-interest banks savings account which only erodes the amount due to inflation over time.
This can be crippling to your long-term financial health. To better understand why, let’s take a look at some numbers so you can see exactly what you lose by not investing.
You Will Need Funds in Retirement
Before we get into the details of what you lose by not investing, it is important to understand your needs in the future.
For most people, the biggest financial milestone is the day you walk out of work and don’t return. But from that day forward, you are still responsible to pay your expenses, even as your paychecks have ceased.
Pensions are fading into memory, and most Millennials have never had one. Social Security is great, but hardly covers the basics needs of many retirees, particularly if you want to maintain the same standard of living in retirement.
When you retire, you will still have to pay for food, clothing, and any other living expenses, but likely on a smaller budget. To make up the difference in income, you will need a retirement fund. And without investing, that retirement fund almost certainly won’t grow enough to support your retirement income needs.
The Cost of Not Investing $20 Per Month
Many people say they don’t have enough money to invest, but you don’t need to save hundreds or thousands of dollars per month to make it worthwhile.
Just saving a little bit adds up. Let’s look at what $20 becomes over time if you were to invest it.
Before interest, $20 per month adds up to $240 per year. Over 25 years, that is $6,000. That alone is a nice little bit of cash, but thanks to the power of the stock market it can be worth quite a bit more.
If you were to invest the $240 at the end of every year for 25 years and earn 10 percent—roughly the annual return of the S&P 500 over time—you would have $23,603 at the end. If you were to invest the $20 automatically every month instead of at the end of the year, you would have $26,537 at the end of 25 years.
The cost of not investing $20 per month over the course of your career is over $20,000! This isn’t chump change. Imagine how far $20,000 goes in retirement. For many people, that is half a year’s income.
Even if you put your money in a savings account, you are losing out compared to investing in the markets. The best savings account interest rates today are around 1 percent; at the end of 25 years saving $20 per month at the beginning of every month, you would have $6,819.08. That is more than $800 more than just stuffing it under the mattress, but still five figures short of what you’d get by investing in the markets.
Still, even that $26,000 will only go so far in retirement. So let’s see what happens when you’re investing more than $20 a month.
The Cost of Not Investing Grows With Your Ability to Save
Odds are you spend at least $70 per month on something you don’t really need.
I used to get cable TV, for example, but then decided it wasn’t worth $70 per month to zone out in front of the boob tube. If you were to cancel cable and invest $70 per month, you would end 25 years of investing with $92,878—again, assuming an average annual return of 10 percent per year, compounded monthly.
Of course, inflation means that that $92,878 won’t go nearly as far in 25 years as it does today. So let’s take it even further. If you were to invest $211 per month in an IRA or Roth IRA, you would hit the maximum $5,500 annual limit imposed by the IRS. Invest that $5,500 per year for 25 years at the average return of the S&P 500, you would have $608,131.98.
Now we’re talking! This is still below what many people need to retire, but it puts you well on the way.
Don’t Lose Out by Ignoring the Power of Investing
You can come up with a laundry list of reasons not to invest, but I can give you 20,000 reasons you should start investing at least $20 per month—and even more reasons to invest even more.
Every day you wait to invest, you are losing out. Stop losing and start making. Your money won’t earn you anything unless you put it to work.