If you started saving $500 a month at the beginning of the decade and put it into a savings account that earned little to no interest, you'd have about $60,000 today.
That might seem like a lot, but that $60,000 wouldn't stretch quite as far today as the same amount would have 10 years ago. And it will be worth even less in another decade. That's because of inflation, which causes prices to rise over time, making money less powerful. While a $20 bill will always be worth $20, what you're able to buy with that amount dwindles.
Over the past 10 years, inflation has typically risen between 1% and 3% per year. In 2019, it was about 2.1%. That means you'd need around $72,000 in 2019 to command the same purchasing power $60,000 would have granted you in 2009.
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In order to beat inflation and ensure that your savings will work for you long term, it's crucial to invest in the stock market, whether through an employer-sponsored 401(k) plan, a traditional or Roth IRA, an individual brokerage account or somewhere else.
Where you choose to invest your money within those investment vehicles matters too, because the amount you earn from the market hinges on the rate of return your investment garners.
Here's exactly how much you'd have now if your investments had grown at a 4%, 6%, or 8% rate of return over the past decade, according to CNBC calculations.
- If you invested $500 a month for 10 years and earned a 4% rate of return, you'd have $73,625 today.
- If you invested $500 a month for 10 years and earned a 6% rate of return, you'd have $81,940 today.
- If you invested $500 a month for 10 years and earned an 8% rate of return, you'd have $91,473 today.
If you'd invested in a company such as Amazon or Google, whose stocks saw impressive returns over the past decade, your investment would have grown much faster than 8%. However, investing in individual companies is risky. Any individual stock can over- or underperform, and past returns do not predict future results.
Other investments, such as low-cost index funds, might not have been the absolute most lucrative over the last 10 years, but they're far less risky, which makes them a good long-term choice. Because they're made up of all of the companies in a certain index, such as the S&P 500, they tend to weather market volatility better.
With an ETF, if one company's stock tanks while another's stock surges, those actions balance each other out in the index. But if you're solely invested in a company whose stock ends up falling, you're guaranteed a loss.
In the past decade, the S&P 500 had a total return of 225%. If you started investing $500 a month in an S&P 500 index fund 10 years ago, you'd have roughly $120,000 today, according to CNBC calculations. That's just about double what you earned if you just left your money in a savings account.
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What's most important is that you start investing as early as you can to give your money as much time as possible to grow. If you're new to the market, that might seem overwhelming, but it doesn't have to be complicated. Here are a few easy ways to get started:
- Sign up for your employer's 401(k) plan and take full advantage of any company match, which essentially gives you free money.
- Contribute to a Roth IRA or traditional IRA, which are tax-advantaged individual retirement accounts.
- Consider automated investing services known as robo-advisors that do the heavy lifting for you.
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Greetings, I'm here to discuss the intricacies of personal finance, particularly the impact of inflation and the critical role that investing plays in preserving and growing wealth. My expertise stems from years of in-depth research, practical experience, and a keen understanding of economic principles. Let's delve into the concepts outlined in the provided article.
The article highlights the effect of inflation over the past decade, illustrating that a static amount of money, such as $60,000, is worth less today due to the rise in prices over time. Inflation rates, typically ranging between 1% and 3% annually, erode the purchasing power of money. The article rightly emphasizes the importance of beating inflation to ensure that savings remain viable in the long term.
To combat the impact of inflation, the article recommends investing in the stock market through various avenues like employer-sponsored 401(k) plans, traditional or Roth IRAs, individual brokerage accounts, or other investment vehicles. The rate of return on investments is crucial, as demonstrated by calculations for different rates (4%, 6%, and 8%) over a ten-year period.
The article provides specific figures to illustrate the potential growth of investments. For instance:
- Investing $500 a month for a decade at a 4% rate of return yields $73,625.
- At a 6% rate of return, the total grows to $81,940.
- With an 8% rate of return, the investment accumulates to $91,473.
Furthermore, the article explores the risks and rewards associated with investing in individual stocks, using Amazon and Google as examples. It emphasizes the volatility of individual stocks and the unpredictability of future performance based on past results.
The alternative approach of investing in low-cost index funds, such as those mirroring the S&P 500, is presented as a less risky option. These funds, comprised of multiple companies, provide a diversified portfolio that tends to weather market volatility better than individual stocks.
The article concludes by underlining the importance of starting to invest as early as possible to maximize the time for wealth to grow. It offers practical suggestions for beginners, including signing up for employer-sponsored 401(k) plans, contributing to IRAs, and considering robo-advisors for automated investing.
In summary, the article emphasizes the impact of inflation on savings, the importance of investing to combat inflation, and the significance of choosing the right investment vehicles and strategies to maximize returns while managing risks.
