Investing 101 // Why You Should Invest
I often hear many women in their 20’s and early 30’s 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 as long as you make it a priority. Unfortunately, most women at this age do not make investing a priority because they don’t really 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 a savings account. And if you can grow your money faster than a savings account can, you will have a lot more money for your various financial goals over time. But how? The answer is simple. Compounding interest will be working in your favor. The best way to explain how compounding interest works is to understand the Rule of 72. The Rule of 72 is a great financial rule of thumb that basically 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% interest rate, divide 2 into 72 and you get 36 years. If you take the same $10,000 and instead use an 8% interest rate, it will take 9 years to double your money – 72/8=9. I don’t know about you but I prefer 9 years over 36 years! The more time you have to grow your money the less money you need, because compounding interest will be hard at work for you.
But where can you get an 8% average return over time? That’s where investing comes in. There are many types of investments you can choose from including stocks, bonds, real estate, treasury bills, etc. I will explain the different types of investments in the next feature, Investing 101-Part 2, but for now let’s look at investing in stocks. In the United States we have major stock market indices, one of them being the S&P 500 Index, which is a capitalization-weighted index of 500 widely traded stocks. In other words, the S&P 500 Index is a basket of 500 different stocks from the 500 largest companies in the United States. So when you invest in the S&P 500 Index, you are buying into the 500 largest stocks in the U.S. And historically, the S&P 500 Index has had an annualized return of 9.87% (between 1926 and 2010).
If you use the Rule of 72 and invest $50 per month into the S&P 500 Index over the next 30 years, you can potentially grow your money to $96,299! If instead you just add the $50 per month into your savings account earning 1% at most, you can potentially grow your money to $20,870. HUGE difference! Which do you prefer?
Investing in things like the stock market does involve more risk including the loss of your principal investment, so you will have to do your homework and make sure you understand the ins and outs of investing. However, remember that even if you only have $50 to invest per month, by starting now you will have more time to allow compounding interest to work in your favor. I challenge you to find the $50 in your monthly spending plan and start investing now. Having trouble finding $50 to invest? Read my article The Everygirl Budgets for more tips and resources on budgeting.
Stay tuned for Investing 101 // Part 2 next month when I explain the different types of investments and what you need to do to start investing in the stock market.
*The rule of 72 is a mathematical concept and does not guarantee investment results nor functions 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 inherit to investing. The S &P 500 is an unmanaged index and cannot be investing into directly. Past performance is no guarantee of future results.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
This post was contributed by Brittney Castro, a Los Angeles CERTIFIED FINANCIAL PLANNER™ practitioner and creator of FinanciallyWiseWomen.com. Brittney Castro, CFP® helps create a financial road map for a woman’s different goals in life. She also educates clients on different options, enabling them to make smart decisions. She has a passion for educating individuals on financial topics and speaks for various groups and organizations. Brittney Castro is available for speaking engagements, radio and telephone interviews, and other media appearances. Connect with Brittney at www.FinanciallyWiseWomen.com. Brittney Castro is not affiliated with TheEveryGirl.com. Brittney A. Castro is a registered representative with and securities offered through LPL Financial, Member FINRA/SIPC. California Insurance License #0F33895