Many individuals are juggling multiple financial obligations and instead of allowing one of the proverbial balls to hit the floor, they have decided to move some goals to the back burner so they can focus on others.
Pay down debt.
Build a fund to pay for your children to go to college.
Start planning for retirement.
These are very real scenarios that cause many to postpone their long-term financial goals. Often times, it seems that the most pressing financial matter gets the immediate attention. These obstacles are valid, but the need to simultaneously work on multiple goals is a must to build wealth.
If you think that setting aside $20 to $50 a month to invest is not a lot of money, you will be surprised at the effect of time and compounding interest on your gains. In a previous article, we discussed how an investor would have made out if they purchased Netflix stock instead of a Netflix subscription. The over 100% return per annum is uncommon, so let’s take a look at the impact on invested monies using average returns of 8%. The chart below shows the effect of adding $250 each month for the next 25 years to an investment account earning 8% in returns.
Over the course of 25 years, $250 a month turns into $196,277. That’s $76,000 in money deposited and invested and another $120,277 in investment earnings. What I am encouraging is to start off by setting aside what you consider small amounts for your saving and investment accounts. Starting off small will help build the discipline that you will need to retain and grow the habit.
You may be asking where can you find investments that are paying 8% in returns without taking on an overwhelming amount of risk. Consider Index Funds. Index Funds are Exchange Traded Funds that are specifically constructed to replicate the performance of a market index like the S&P 500. Exchange Traded Funds (ETFs) are baskets of securities that trade on the stock exchanges. Examples of Index Fund ETFs are SPDR S&P 500, iShares Core S&P 500, and Vanguard S&P 500. Both ETFs and mutual funds are baskets of securities, but they are very different investment vehicles. ETFs trade real-time on the stock exchanges during market hours, but mutual funds trade after the markets close.
With the advancement of technology, there are several ways to begin forming healthy savings habits. Make the deposits to your savings and investment accounts automatic and leverage technology to help you. The earlier you start, regardless of the amount, the better you can leverage time and make it your asset. Big or small, start saving and investing. Take a look at your specific financial situation and determine whether or not it makes financial sense to save and invest while you service debt obligations. Slow and steady wins the race.
Disclosure: This article is not intended to be a recommendation to purchase a specific stock. Research any investment prior to making it.