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For most of us, $250 isn’t a small chunk of change. But unfortunately, it doesn’t look like much next to our monthly bills, which are usually in the thousands of dollars. And it looks even smaller next to the hundreds of thousands or even millions of dollars we plan to spend in retirement.
But if you don’t need the $250 right now, there’s a simple way to turn that cash into a much larger sum that will go a lot further in the future. Here’s how.
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It’s simpler than you think
Investing your money is the easiest way to grow it over the long term. All you have to do is open an investment account and decide what to invest in. Then, you just leave your money alone for a while and check in periodically.
How much you earn depends on several factors, including how long you leave your funds invested and what kind of return you earn during that time. But the stock market has an average return of about 10% per year over the last 50 years, so there’s a good chance you earn a decent profit even when investing small sums.
If you made a one-time $250 investment and it earned a 10% average annual rate of return over 30 years, it’d be worth $4,362 — or over $4,100 more than you originally started with. But if you really want your money to grow, regular contributions is key.
Investing $250 per month with a 10% average annual rate of return leaves you with nearly $520,000 after 30 years, despite only contributing $90,000 of your own money. That’s a profit of $430,000. And if you’re able to set aside more money per month or you leave your money invested for longer, you could end up with a lot more.
Of course, investment returns are never this linear. You’ll likely have some years where you’ll earn more than 10%, some more where you earn close to or even a little less than that, and a few years where you lose money. But it’s important to focus on the long term when investing.
If you have money you plan to spend within the next five to seven years, it’s best to keep this in cash rather than risk losing it. Only invest funds you don’t need to withdraw in the near future so you can give them the time they need to grow.
How to start investing
A retirement account is a great place for most people to stash their long-term savings. These offer tax benefits that taxable brokerage accounts don’t. However, they also come with limitations. In most cases, you can’t access retirement account funds before age 59 1/2 without paying a penalty, so don’t keep any funds here that you plan to spend sooner.
You may already be investing through a 401(k) offered by your employer. Or if you don’t have access to one of these, you can open an IRA. You’ll have a choice between traditional IRAs, which give you a tax break upfront but require you to pay taxes on your withdrawals later, or Roth IRAs, which offer tax-free withdrawals in retirement if you pay taxes on your contributions when you make them. Usually, Roth IRAs are the smart choice unless you believe your income will drop significantly once you retire.
As for what you invest in, that’s up to you. Index funds are a great option if you’re new to investing and want to quickly diversify your portfolio. These give you a stake in hundreds of top companies with a single purchase, and they’re known for being pretty affordable too. Most people only pay a few cents to a few dollars per year to own one.
You could also build your own portfolio of stocks, but you should aim for at least 25 different companies across several sectors. This will help reduce the hit your portfolio takes if any of your stocks dip.
If you aren’t able to invest right now or you can’t invest as much as you’d like, see if you can take steps to bring in more income. This could involve working overtime, starting a side hustle, or pursuing a higher-paying job elsewhere. The sooner you get started, the longer your investments will have to grow.
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