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Do you ever feel like you’re missing out on the big investment returns we always talk about? If so, you’re not alone. We get lots of comments from folks who say their growth rate never breaks 3%.
Well, we’re here to shed light on one simple mistake that could be keeping you—and your returns—down. It all comes down to the tools you use to grow your money.
Safety in Numbers?
If there’s one thing Americans learned from the Great Recession, it’s how to play it safe with money.
The fallout from the financial markets set off a wave of distrust among many investors, which led many to shy away from the markets altogether. According to Bankrate.com, cash accounts rank second behind real estate for long-term savings, with more than half of Americans avoiding stock-based investments altogether.
What does cash offer that the stock market doesn’t? A guarantee.
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Basic savings accounts, certificates of deposit (CDs) and money market accounts—all types of cash, or high-yield, accounts—are FDIC-insured up to $250,000 per person on the account. If your bank goes out of business or up in flames, your money is safe as long as it’s no more than $250,000.
That kind of security is especially attractive to young investors who don’t want to get burned by another financial meltdown. Cash is the top choice for long-term savings for the under-30 crowd, with only 26% invested in the stock market.
Cash accounts are a great way to save for emergencies . . . but not your retirement.
That’s because “high-yield” accounts come with lousy interest rates. Today’s accounts fetch a whopping 1–2% annual percentage yield (APY), though less than 1% is much more common. Even at a 2% APY, it would take 36 years for a balance of $10,000 to double to $20,000.
Principal protection and a guaranteed interest rate may sound perfect to a skittish investor—until you factor in inflation. The long-term average inflation rate is just over 3%. That’s basically the rate at which your money loses value each year. Let’s say you have $10,000 sitting in a CD. Fast forward 40 years, and you’d need about $33,000 to get the same purchasing power that $10,000 has today. Yet, your CD would only be worth about $22,000. It doesn’t matter if your balance is growing—you’re still losing money!
Potential Value of $10,000 in 40 Years: Inflation vs. CD
A Chance Worth Taking
You want to live comfortably in retirement, right? Of course you do! Who doesn’t?
Then it’s time to get comfortable with risk.
Dave recommends investing in mutual funds because they enable you to spread your risk across dozens, even hundreds, of companies. If one company has a bad year, it won’t spoil your entire nest egg because you still have lots of other funds to balance it out.
No, mutual funds don’t come with guarantees.
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Yes, you can lose money.
No, you can’t predict how much they will grow from year to year.
So why bother? Because with that risk comes the potential for greater reward. Mutual funds can give you the growth your nest egg needs to support you through 20–30 years of retirement.
Imagine you have $500 a month to save for retirement. If you put it in a CD, you could have nearly $250,000 after 30 years. Fidelity estimates that total healthcare costs in retirement could average $220,000 for a couple retiring today. That doesn’t leave much room for eating and dreaming in your golden years.
Invest that $500 a month into a mutual fund instead, and you could retire with more than a million bucks!
Potential Value of $500 Monthly Investment After 30 Years
In both scenarios, you put in the same amount of money: $180,000. The difference is all in the interest earned!
Build a Future You Can Feel Good About
It’s easy to let fear get the best of you. But that’s not an excuse to sabotage your future.
If putting money in the market makes you nervous, team up with an investing professional.