Investing always carries a degree of risk, but uncertain times like these really bring that fear of loss to the forefront of people's minds. Though it might feel safer to keep your money locked up tight in a savings account, that's actually not the best move if you're trying to grow your wealth quickly. Here's what you need to know before you rule out investing.
Investing wins over the long term
Losses, no matter how small or short-lived, can be concerning, especially to those who are new to investing. But it's important to recognize that these ups and downs are normal, and they happen to the richest investors, too. Often, investments bounce back and you end up making money in the long term.
Consider the S&P 500 index. This is a well-known market index that contains 500 of the largest publicly traded companies in the U.S. Over the past few decades, it's seen returns of over 30% in several years, but in 2008, it dropped 37%. While that definitely hurt, investors who held on were rewarded with strong returns over the following two years.
And over the last 30 years, the index has a 10.7% compound annual growth rate. That means on average, it returned 10.7% each year.
To put that in perspective, say you invested $10,000 and it earned a 10.7% average annual rate of return over 30 years. That single investment would be worth over $211,000. This doesn't factor in investment fees, but if you chose an S&P 500 index fund, for example, these would be minimal.
By comparison, if you stuck your $10,000 in a savings account and left it there for 30 years, you'd probably receive a 2% annual percentage yield (APY) — and that's being generous. That would leave you with $18,114 at the end of 30 years, and this assumes you don't withdraw any money and your APY doesn't drop below 2%.
There's really no comparison. If you're trying to grow your wealth as quickly as possible, investing has to be a part of your strategy. If you stick to traditional savings accounts, inflation is slowly going to rob you of your buying power, and you'll have to set aside a lot more money every month to reach your goals.
But there's some money you should never invest
The examples above prove that investing can be a great choice for your long-term savings, but the risk of loss makes it a bad choice for money you might need soon. Short-term savings, perhaps for a car or home down payment, are best kept in a savings account if you plan to use it in the next few years. That way, you won't have to sell your investments at a loss when you need to tap these funds.
Your emergency fund is also best kept in a savings account. You never know when you'll need this money, so it has to be accessible and secure from loss. It's ultimately up to you how much you choose to stash here, but you definitely shouldn't go under three months of living expenses.
If you don't have an emergency fund, you should work on this first before you think about investing. It's key to maintaining your financial security, no matter what unexpected costs arise. But once you have that under control, throw the rest of your savings into a taxable brokerage account or retirement account, where it can grow faster.
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