I would like to start this article off by clearing up some of the biggest misconceptions I hear in regard to investing.
First of all, investing your money isn’t hard. It doesn’t require a degree in finance or business, and it doesn’t require a vast understanding of the stock market and all of its publicly traded companies. You don’t need to spend hours poring over company financial reports, and you don’t need to conduct extensive research to find the right stocks to invest in.
With all of these potential excuses, it’s no wonder there so many young people who are completely missing out on the incredible opportunity they have nowadays to invest their money into the stock market in about as much time as it takes for them to pop it into a savings account. It really is that simple, and I would like to take the time to explain exactly how simple and how important investing your money can be within the next few paragraphs.
Savings Accounts Are Useless, Sort Of
Ok, maybe savings accounts aren’t completely useless. They serve a purpose, to provide you with extra money quickly when things come up. They should be used as a safety blanket for expenses that require immediate funds, but outside of holding a security blanket equal to 1-2 months worth of expenses, your savings can be put to better use.
In order to fully understand just how poorly a savings account compares to the average stock market return let’s take a look at an example. Let’s say you have $3,000 saved up and you are planning on depositing $100 out of your paycheck every month into your savings account. Even though most savings accounts have very low interest rates of around .06% per year, there are some online options that offer as much as 2%. We will look at both options in this example and include the third option which would be the average return from investing in the stock market instead (around 10% annual return).
As you can see, putting your money in a traditional savings account with .06% annual interest rates earns you next to nothing on your investment. It is almost the same as just leaving it in your checking account. A good savings account with a 2% annual return looks a little better but still has only earned you an extra $1,936 in interest. The average stock market return however has compiled a return of $13,605 which almost doubles what you have put in over 10 years.
This is just a small scale example of how powerful compound interest can be and how much money your future self could be missing out on by only using a savings account. The difference in return becomes even more drastic when the time period gets longer and the amount of money invested gets larger. Granted this does not take into account taxes and inflation but it is still an apples to apples comparison of how much more efficient the stock market is than a savings account is.
I Know Nothing About Stocks, How Do I Invest
Many people get to this point in their research and think it sounds great, but they have no understanding of the stock market and brush this off as something they can’t take advantage of because of their lack of experience on the topic. While it does take a great deal of knowledge, research, and time to even begin to understand some of the more complicated concepts the stock market has to offer, there is also an extremely simple and safe way to take advantage of the stock market’s returns, and its called an ETF.
Putting your money in an ETF is the simplest way to invest and it can be done by anybody. The most popular ETF goes by the stock symbol SPY and is made up of stocks from a wide variety of companies. Essentially, by investing in this ETF, you are investing in the stock market as a whole. This protects you from losses that can be incurred from a couple of companies doing bad and diversifies your investment across a complete range of industries. As you can see below, the SPY ETF has some down years but when investing for the long-term can be looked at as relatively safe since the stock market has always produced positive gains over a long enough time period.
The SPY ETF is a great place to start for people who have limited knowledge about the stock market. Once you start putting some money into it and see how easy it is, you can always start looking around at other ETF’s that are similar. The most important thing is that you start as soon as possible so that you start taking advantage of compound interest at a young age. Your money will have much more time to grow and your returns will increase exponentially by starting earlier in life.
Where Can I Invest In An ETF
The best place you can look to invest in a simple ETF like SPY is through a free trading online investment brokerage called Robinhood. If you haven’t heard of it, read our Robinhood review and check out for yourself how simple it is. Creating an account takes a matter of minutes and once you get the app you can start investing for free. There are other options with more popular names such as E-Trade but they charge you every time you make an investment into an ETF. This can be very inconvenient if you are making monthly investments. Overall Robinhood is the easiest way to learn, and it allows you to invest for free which is the most important thing for beginners.
Once you have an account, the process of investing is very easy. Simply type the name of the ETF you are interested in into the search bar and withing minutes you can be invested in the stock market. Allow your money to sit and easily see how much it grows with a simple investment tracking homepage.
What If I Need To Use My Money
The reason why we advise you to have a savings account with enough money to cover 1-2 months worth of expenses is so that you won’t need to dip into your investments every time you hit a rough patch. You want to invest your money and only cash out when you actually want to use your money so that you can avoid paying taxes on your gains until the end. Also, depending on the market, your investment could be up or down and you don’t want to be selling off shares when they are at a low point just so you can cover living expenses.
Despite the fact that you want to try to leave your money alone once invested, cashing out is as easy as pushing the sell button on your phone and you can withdraw the money from your account within two weeks or so. That is enough to put your mind at ease if you really hit financial struggles and need to access more than just what you have in savings.
Start Investing Today
Hopefully this article has showed you the importance and simplicity of investing your money in the stock market and if we did our job, you are at least considering opening up an investment account with someone. At the end of the day, the most important thing is that you are starting to save money early and that you are taking full advantage of compound interest at a young age. Don’t get too hung up on in-depth stock market tactics and just use a simple ETF to start. You can always dive more in-depth with some of the more advanced stock market concepts later once you have some experience with investing and some money put away.
If you are looking for a way to establish a side hustle that will allow you to make more money to invest with, check out our article that explains how to establish an online income in your free time. Creating more income streams goes hand in hand with investing, and when combined can lead to financial freedom long before the average age of retirement.
If you have a good starter ETF that you like to use as a simple, diverse place to invest your money, comment below and let us know. There are so many ETF’s out there it is always interesting to hear what other people like to use. As always feel free to ask any questions and we will get back to you as soon as possible, and if you found this post helpful make sure to share the wealth below on social media!