How to invest when you feel like you're behind
You know you should’ve started investing yesterday, but, since you can’t, start today!
There’s a Chinese proverb that says: “The best time to plant a tree is 20 years ago; the next best is today.” The same can be said of saving. The best time to start is 20 years ago —or even before you were born—the second best is today.
Today, almost everyone understands the importance of saving for the future — whether it’s retirement, a down payment on a house, or children’s education expenses. Unfortunately, just thinking about saving money doesn’t actually work. You have to start somewhere, but most people don’t know where the starting line is.
In reality, the journey to save for retirement is much less perilous than most imagine. It can be difficult at times, but it’s nowhere near the slog that many fear it might be. And no, I’m not talking about storing away your leftover cash each month in a savings account that earns pennies each month.
No one wants to outlive their savings or wonder if they’ll be able to afford retirement. If you’re thinking about starting to save or invest it’s time to explore how compound interest can boost your savings.
Compound Interest Calculator
The Power of Saving Early
Most people think: “If you want to save $1 million over 20 years, that’s $50,000 per year. I can’t do that.”
If you told those same people that, in actuality, to save $1 million over 20 years, all you needed to do was save $35,000 per year, they’d think it was much more doable. If they knew that it’d only take 15 years of saving $50,000 to hit the $1 million mark, some of them would find a way to do it. (These figures assume a 6% annual rate of return.)
The reason for this difference in numbers is compound interest — what Einstein called the 8th wonder of the world. It’s the power of earning interest not just on your contributions, but also on the interest that you already earned — earning a return on money that you didn’t have to save in the first place.
The power of interest also explains why, if you’re 30 years old today and want to have $1 million by the time you’re 50, you’ll have to contribute $35,000 per year; but if you wait just 5 years to start, you’ll have to contribute nearly $60,000 per year to hit your $1 million mark. (These figures assume a 6% annual rate of return.)
6 Reasons You Should Start Investing Immediately
If you’re just getting started saving and beginning to feel discouraged, DON’T! When it comes to saving money, it’s important not to feel bad about whatever you have or haven’t done up to this point. What really matters is that you’ve made the decision to start today and put yourself on the right track to increasing your savings and putting your money to work for you.
The power of compound interest demonstrates the importance of getting started saving earlier rather than later. But, if you need more reasons to start saving today, some reasons to start saving now include:
1. Avoid lifestyle creep
Most people tend to build a lifestyle around their income. Whether you’ve been working for 20 years or are just starting out in your career, your household budget will likely be based on how much money you make. If you aren’t conscious of your spending and careful to set money aside, your lifestyle expenses will likely grow until they consume all of your income, if not more (hello, credit card debt!).
2. You can’t control your income
Most people can’t really control how much money they make. Sure, you can try to find a second job or find some part-time work, but it’s usually much easier to control expenses and savings. What this means is that if you decide to hold off on savings until your income hits a certain level, you have no way of knowing whether you may be waiting for 6 months or 6 years.
It's better to structure your household budget, regardless of income, to let you set aside some savings every month — rather than waiting until you think you’ll be rolling in cash.
3. You’ll need the money
You may not think so now, but at some point in the future, you’re going to need access to savings. Even if you aren’t focused on your retirement, yet (which you totally should be, by the way), you could still encounter a medical emergency. Or your car could break down. Or you may have to move. Or all of the above. In the same month.
The important thing is to start saving now so that you’ll have money that you can access later. The way doesn’t really matter.
4. There will always be a reason not to save
Life is what happens when you’re busy making plans. You may have the best of intentions to start saving as soon as you get your car paid off. Or as soon as you get your new house furnished. Or as soon as you get your long-overdue promotion.
As long as you think you have a reason to put off saving, you’ll always come up with another. There is no perfect time to save money, which is why it’s important to do it now.
5. You can’t get your time back
You may be reading all of these and thinking: “Gee, Dock, this is all great, but where were you 15 years ago?”
And yeah, sure, if you’d started saving even $5 per day 15 years ago, you’d already have a nice little $44k nest egg built up (assuming a 6% average annual return).
But we can’t do anything about that. All we can do is make the best choice we can today and move forward. So that’s what’s best for us to focus on — to do everything we can to build savings starting right NOW.
6. No one has ever gone broke betting on U.S. stocks
People make thousands of decisions every year that have the potential to hurt them financially. Whether to change cars. Whether to buy or lease. New or used. What insurance.
Investing shouldn’t be another source of worry. People have enough that they have to overcome mentally or emotionally to really commit to saving; choosing an investment doesn’t need to be another one.
Luckily, things like index funds can take a lot of the guesswork out of investing. These funds are very well-diversified and cost-effective. All that’s left for you to do is pick one or a few funds and invest as much as you can every day, week, or month.
To learn more, be sure to check out our ultimate guide to index investing.
Adopt a High-Savings Lifestyle
One of the most important things you can do to set yourself up for success in saving and investing is to adopt a low-cost lifestyle. This doesn’t mean that you need to become a minimalist (although that might not hurt). But it’s pretty difficult to maximize your savings rate without minimizing expenses.
There are some things that are relatively simple that anyone can use to cut their spending and save more money every month:
- Stop eating out at restaurants, or at least quite consuming alcohol at bars or restaurants
- Take a 30-day break from drinking
- Start having friends over instead of meeting out
- Avoid from buying any new clothes or accessories for 2 - 12 months (tip: if you need to find a middle ground, let yourself buy items occasionally in second-hand stores or thrift shops)
- Pack your lunch
- Actually watch the shows and movies you have free access to through streaming services rather than renting movies or going to a theatre
- Stop buying processed food (you’ll be amazed at how much you save by preparing your own meals and how much less you eat when everything takes preparation)
- Take a 30-day break from eating meat (it’s expensive and you may not even miss it)
The biggest thing about constructing a lifestyle to optimize your savings is to be conscious in everything you do. It’s amazing how many things people do for no reason except they’ve always done them. And yet, once you’ve built a lifestyle and developed habits, it’s incredibly difficult to adjust later on.
The important thing is to deconstruct your lifestyle and break down all of your daily and weekly habits. Then, rebuild from scratch based on individual decisions — the things that you want to do every day or every week; that you WANT to be a part of your life.
Establish savings goals
If your goal is to start saving to build toward financial independence, then all of this information needs to be consolidated around some defined financial goals.
And what should those goals be?
Simple. Your goal, in adjusting your lifestyle, in saving, and in investing, should be to build your savings until they reach 25 times your annual expenses.
Once your savings reach a level where you only need about 4% of what you have saved in order to cover your annual expenses, you will have reached a point where you’re financially independent. Once your savings reach that level, you should be able to invest your savings and cover your annual expenses with the interest that you earn on your savings each year.
From that point on, you’ll be able to decide when and how you want to work, and what you want to do each day. As long as you’re able to keep your expenses down (and your savings up) so that your savings are at least 25x your expenses, you’ll be able to live a fully independent life.
What to Do With Your Savings
Once you start to save, you can’t just put your money in a bank and expect it to grow. Interest rates are so low today that you’ll need to invest to really put your money to work for you — so that it can grow faster.
When you start investing, you’ll have to make some choices between certificates of deposit (CDs), stocks, bonds, and other vehicles.
But, if you’re an individual investor, you probably shouldn’t try investing in individual stocks or bonds. There are just too many things that can impact them. Too many ways to lose money.
Instead, it’s a good idea to focus on investing in things like mutual funds and exchange-traded funds (ETFs). These are funds that are managed by professional investors and are diversified across many individual stocks and bonds. Effectively, you can buy one share of a mutual fund or ETF and actually own pieces of shares in dozens of underlying companies.
While there are thousands of mutual funds and ETFs available, what most investors need is something called an index fund. Index funds are very cost-effective funds that are diversified across many underlying investments and structured specifically to track an index like the S&P 500.
For more on how to get started with index investing, see our ultimate guide here.