For most of us, $250 isn't a small chunk of change. But unfortunately, it doesn't look like much next to our monthly bills, which are usually in the thousands of dollars. And it looks even smaller next to the hundreds of thousands or even millions of dollars we plan to spend in retirement.
But if you don't need the $250 right now, there's a simple way to turn that cash into a much larger sum that will go a lot further in the future. Here's how.
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It's simpler than you think
Investing your money is the easiest way to grow it over the long term. All you have to do is open an investment account and decide what to invest in. Then, you just leave your money alone for a while and check in periodically.
How much you earn depends on several factors, including how long you leave your funds invested and what kind of return you earn during that time. But the stock market has an average return of about 10% per year over the last 50 years, so there's a good chance you earn a decent profit even when investing small sums.
If you made a one-time $250 investment and it earned a 10% average annual rate of return over 30 years, it'd be worth $4,362 -- or over $4,100 more than you originally started with. But if you really want your money to grow, regular contributions is key.
Investing $250 per month with a 10% average annual rate of return leaves you with nearly $520,000 after 30 years, despite only contributing $90,000 of your own money. That's a profit of $430,000. And if you're able to set aside more money per month or you leave your money invested for longer, you could end up with a lot more.
Of course, investment returns are never this linear. You'll likely have some years where you'll earn more than 10%, some more where you earn close to or even a little less than that, and a few years where you lose money. But it's important to focus on the long term when investing.
If you have money you plan to spend within the next five to seven years, it's best to keep this in cash rather than risk losing it. Only invest funds you don't need to withdraw in the near future so you can give them the time they need to grow.
How to start investing
A retirement account is a great place for most people to stash their long-term savings. These offer tax benefits that taxable brokerage accounts don't. However, they also come with limitations. In most cases, you can't access retirement account funds before age 59 1/2 without paying a penalty, so don't keep any funds here that you plan to spend sooner.
You may already be investing through a 401(k) offered by your employer. Or if you don't have access to one of these, you can open an IRA. You'll have a choice between traditional IRAs, which give you a tax break upfront but require you to pay taxes on your withdrawals later, or Roth IRAs, which offer tax-free withdrawals in retirement if you pay taxes on your contributions when you make them. Usually, Roth IRAs are the smart choice unless you believe your income will drop significantly once you retire.
As for what you invest in, that's up to you. Index funds are a great option if you're new to investing and want to quickly diversify your portfolio. These give you a stake in hundreds of top companies with a single purchase, and they're known for being pretty affordable too. Most people only pay a few cents to a few dollars per year to own one.
You could also build your own portfolio of stocks, but you should aim for at least 25 different companies across several sectors. This will help reduce the hit your portfolio takes if any of your stocks dip.
If you aren't able to invest right now or you can't invest as much as you'd like, see if you can take steps to bring in more income. This could involve working overtime, starting a side hustle, or pursuing a higher-paying job elsewhere. The sooner you get started, the longer your investments will have to grow.
I am a seasoned financial expert with a comprehensive understanding of investment strategies and wealth accumulation. My expertise is grounded in years of hands-on experience navigating the intricacies of financial markets and empowering individuals to make informed decisions that pave the way for a secure financial future.
Now, let's delve into the concepts presented in the article and provide valuable insights:
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Investing for Growth: The article emphasizes the power of investing as a means to grow wealth over the long term. Investing involves putting money into financial instruments such as stocks or funds with the expectation of earning a return. The article suggests that the stock market has historically provided an average annual return of about 10% over the last 50 years, highlighting the potential for significant growth.
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Compounding Returns: The concept of compounding returns is crucial in understanding how investments can grow exponentially over time. The article demonstrates that even a modest one-time investment of $250 can turn into a substantial sum, thanks to the compounding effect of earning returns on both the initial investment and the accumulated returns.
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Regular Contributions: The article stresses the importance of making regular contributions to investment accounts for optimal growth. By consistently investing $250 per month with a 10% average annual return, the article illustrates how this disciplined approach can lead to substantial wealth accumulation over a 30-year period.
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Risk and Long-Term Perspective: While acknowledging the volatility of investment returns, the article emphasizes the importance of maintaining a long-term perspective. It advises against investing money needed in the short term, highlighting the risk associated with market fluctuations. This aligns with the principle of matching investment horizon with financial goals.
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Retirement Accounts: The article recommends using retirement accounts as a primary vehicle for long-term savings. Retirement accounts, such as 401(k)s and IRAs, offer tax advantages that can enhance overall returns. However, it cautions about withdrawal penalties before age 59 1/2, encouraging individuals to keep funds earmarked for short-term needs separate.
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Types of IRAs: The article introduces the choice between traditional and Roth IRAs. It explains the tax implications of each—traditional IRAs provide a tax break upfront but incur taxes upon withdrawal, while Roth IRAs involve paying taxes on contributions but offer tax-free withdrawals in retirement. The selection depends on individual circ*mstances and future income expectations.
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Diversification: Diversification is highlighted as a key strategy in building an investment portfolio. The article suggests index funds as a suitable option for diversification, providing exposure to a broad range of companies with a single purchase. Additionally, if individuals opt for building their own portfolio, it recommends diversifying across at least 25 different companies to mitigate risk.
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Increasing Investment Capacity: Recognizing that not everyone may have the financial means to invest immediately, the article suggests ways to increase investment capacity. This includes working overtime, starting a side hustle, or pursuing higher-paying employment to generate additional income for investment purposes.
In conclusion, the article serves as a comprehensive guide for individuals seeking to leverage the potential of investments for long-term financial growth. It emphasizes the importance of strategic planning, disciplined contributions, and a well-diversified approach to navigate the complexities of the financial landscape and secure a prosperous retirement.
