I’m a huge fan of investing. I think it’s one of the best ways to build wealth over time. Consistent investing can be a good way to create a successful retirement. Even if you start small and build up, you can make good progress with your finances and your future when you invest.
My husband and I started investing in my retirement eight or nine years ago. We started out by investing $100 a month. It was all we thought we could afford to invest, so that’s what we did. Over time, as we began to earn more and our situation improved, we began investing more and more. Now we invest closer to $600 a month, with my husband’s employer offering us even more, since there is a match.
There are plenty of folks who like the idea of setting aside money, but they do so in a savings account because it’s considered “safer” than investing. However, you might not be able to build the wealth you need — no matter how much you set aside each month — if you just focus on saving.
Saving vs. Investing
One of the cool tools you can use to see the difference between saving and investing is the Wealth Calculator from Stocks for the Week. Say you could set aside $500 a month. If you did this for 20 years, the calculator shows you that you can expect to end up with $246,637. That’s not nearly enough to retire on — and this makes the assumption that you are going to earn 2% APY on your money. But what if you put half of it in savings and invested the other half? The Wealth Calculator
But what if you put half of it in savings and invested the other half in stocks? The Wealth Calculator assumes that this setup would net you about 6% of annualized return. After 30 years you would have $501,893. For the very careful retiree, it might be possible to survive on this money, as long as you kept working part-time for the first decade or so of retirement, and you lived very frugally.
Finally, what if you invested all of your $500 a month in stocks? After 30 years, you would wind up with $1,119,796 according to the Stocks for the Week calculator. If you believe the 4% rule, that’s enough for you to get about $44,791.84 per year to live on, and there is a good chance you will outlive your money. Not bad. For many retirees who choose to retire in a low-cost area, that’s enough to live comfortably, and even travel a little bit.
Of course, the calculator just gives you a rough idea of what to expect. It doesn’t take into account inflation, and it operates on assumptions of long-term performance, since the actual performance of the market varies according to conditions.
The point of the illustration is to help you figure out how much you should set aside, and to help you see how investing in stocks — even if you invest between 50% and 75% of your contributions in stocks — can help you build wealth at a faster pace. With this kind of planning, you can prepare for a financial freedom.