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high cost of not investing

The High Cost of NOT Investing NOW

 

How much interest have you earned on your savings in the past five years?

If you’ve done your due diligence scoping out a high yield savings account, you may have earned as much as 1 percent.

On a $29,500 balance, that would be $295 per year or $1,475 in 5 years. Not bad for just leaving your money lying around in savings, right?

That is, until you calculate the opportunity cost of not investing that money.

Admittedly, I didn’t arbitrarily pull $29,500 out of thin air – it’s the amount of money I’ve personally invested since I started investing in 2011. (Not as much as I’d like, but not terrible for not having had perks like steady employment and 401k benefits).

The investment returns on the $29,500 I’ve slowly and steadily set aside over the past five years have surpassed $6,000. (Remember, that’s from contributions over time. If I’d started with $29,500 in my brokerage account from day one, the return would be much higher).

 

Investment returns

 

So, which would you rather have, an additional $1,475 or additional extra $6,000 plus?

 

Admittedly, the realities of saving and investing cannot be oversimplified as such. There many personal factors to consider, like – have you set aside savings for emergencies? Are you accumulating funds as part of an aggressive debt repayment plan? Are you anticipating a near-term big-ticket purchase like a car or home? These could all be good reasons for favoring greater savings in the present.

However, savings at the exclusion of investing can prove problematic over the long term.

Investing grows your money in a way that savings cannot match. Just look at the example above – a $1,475 vs. $6,000 return – and that’s just five years in. With the forces of time and compounding, the spread between my potential savings returns and my potential investment returns grow exponentially wider.

 

The High Cost of Not Investing Now

 

According to Bankrate’s recent Money Pulse survey, a full 54% of Americans are not investing.

Among millennials ages 18 to 35, just 33% are investing.

In my most recent trek around New York City, #TalkingTaboo with millennials, the most common response to my investing inquiries was, “no, I’m not investing yet”.

 

Millennials on Investing

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I get it. When you’re making $40,000 a year in a high cost of living city, staring down a $30,000 student loan bill, the thought of setting money aside for some day after age 59.5 seems kind of crazy.

That is until you consider the cost of NOT investing.

 

According to Liz Weston over at MSN Money –

“Someone who puts $4,000 a year into retirement accounts starting at 22 can have $1 million by age 62, assuming 8% average annual returns. Wait 10 years to start contributing, and you’d have to put in more than twice as much – $8,800 a year – to reach the same goal.”

In other words, the younger you start investing, the more you can reap the benefits of compounding and long-term market gains.

Conversely, the longer you say “not yet” and wait for “someday”, the more you have to contribute later on just to catch up.

Now I know that thinking about dollars supporting some distant retirement future can seem pretty intangible when you’re a 20 something practically living paycheck to paycheck – so try thinking about it this way.

Every dollar you earn through your investments, is a dollar you don’t have to earn at your job.

Now think about how many hours, days or weeks would you have to work to make up the roughly $4,500 difference between the investment returns and savings returns outlined at the start of this post? How about the potential half-million-dollar difference of waiting another decade or so to start?

The opportunity cost of not investing now is significant and very real.

Then again, so is problem of debt, limited income and living costs. So let’s talk excuses….

I Can’t Afford to Invest…

 

In Bankrate’s survey, 46% of millennials said lack of money was their reason for not investing in stocks.

Having spent a lot of time looking inside the financial lives of my fellow millennials, I know that not being able to “afford investing” is in fact a reality for many people. That said, it doesn’t have to be.

Do whatever it takes to get your finances in order so that you can begin investing ASAP.

Cut down your cost of living, refinance your debt, foster additional sources of income – do what needs to be done in order to make small monthly contributions to your investment accounts as non-negotiable as your housing payment.

With new, low-cost investing platforms (like this one), you really don’t need much to get started.

 

I Don’t Know Anything About Investing…

 

I want to take a moment here to address those of you who might be under the impression that because I write about personal finance I’m some kind of investment genius and that’s why I’ve enjoyed such favorable returns on my few investments.

Let me clear that up right now. I am NOT an investing pro. I’m a cash flow ninja with a basic understanding of wealth management.

Meaning, I can look at the money flowing into and out of someone’s life and optimize the equation to help people reach their financial goals. When it comes to investment strategy specifically, I’m in the set it and forget it camp. No fancy stock picking, day trading or anything like that. The money I’ve earned in the market has been a result of parking my money in a few low cost, diversified index funds and letting it grow without interference. That’s it!

I never realized how easy investing was until I started doing it.

In Bankrate’s survey, 35 percent of millennials cited their lack of knowledge about stocks as their reason for not investing.

With today’s technology though, you don’t have to worry about having some kind of specialized knowledge to start. Using a simplified, low cost investment platform like Betterment, you can begin investing by answering a few simple questions about your financial life and future goals. Based on your answers, the pros will suggest an appropriate investment strategy and walk you through implementing it. It really can be that simple.

 

But Savings is Safer….

 

The third most common reason millennials cited for not investing is the notion that keeping money in savings is a safer bet for protecting their wealth.

Having graduated in 2008 and experienced early adulthood in the thick of the financial crisis, I can understand this sentiment. Having also experienced significant market gains in the years since the financial crisis however, I know that investing is a long-term strategy.

While the stock market can be volatile in the short-term, over the course of ten years or more, returns historically average around 7 percent (at least according to the pros who analyze historical performance).

Savings sitting in accounts with paltry interest rates of 1 percent or less, actually end up losing value over the long-term due to inflation – even with earned interest. As such, you can argue that keeping all your cash tied up in savings is more dangerous or “risky” to your financial health than smart investing.

Investing is an opportunity to outpace inflation and reap the benefits of growth, which for millennials – facing longer lifespans, rising healthcare costs, the disappearance of pensions and an uncertain social security landscape – will be critical.

 

How to Start Investing Now

 

  1. Take stock of your financial life. How does your cost of living compare to your income and what can you do to widen the spread? Spend less? Earn more? Both? Track the numbers so you know exactly how much you can afford to set aside each month.

 

  1. Build emergency savings. While I don’t recommend keeping all of your money in savings, having about six months of living expenses set aside to cover emergencies is critical.

It’s important that this cash reserve remain liquid and accessible, which is why your emergency fund should remain in a high yield savings account as opposed to investment account.

I know that building up six months worth of living expenses in savings might take a while, so once you’ve funded one month’s worth, start splitting your savings contributions in between your emergency fund and investment accounts.

Be sure to consider any interim financial goals too – saving for a vacation, a home, a car, etc. However many financial obligations you’re funding though, I strongly recommend taking investing off the back burner. Even if you’re setting aside as little as $25/week in your investment accounts, getting into the habit and reaping the benefit of your most valuable investment asset, time, is what smart investing is all about.

  1. Consider your debts. Just as you should consider your short and medium-term savings goals when calculating how much you can afford to contribute to your investment plan, be sure to also consider any debts too.

Keeping up with minimum debt payments should be a priority for keeping your credit in check. Should you have any high interest consumer debt, it’s important to attack those balances aggressively. But balances on low interest debts, like many student loans, can be tackled in tandem with a starter investment strategy. You don’t have to wait to finish paying off the former to get started on the latter.

After all, if your student loan interest rate is just 3 percent and your average investment returns are 7 percent, you’re still coming out ahead in the long-term by putting cash surpluses above your minimum debt payments towards investments.

 

  1. Start investing – now!  Strike “someday”, “not yet” and any other excuses from your investment vocabulary.

Open an account with Betterment or another simple, low cost investing platform, taking advantage of the tools and technology to build your foundational knowledge of investing, contribute to your investment accounts and start building a financial future on your terms.

 

25 responses to “The High Cost of NOT Investing NOW

  1. It’s shocking to see how many of my colleagues, some of them very well paid, are not investing into their 401k’s or anywhere else. You’re leaving so much on the table in the form of potential tax savings, dividends, and of course, appreciation.

    My advice to them is to make it a habit by just making an automatic deduction every so often. You won’t feel it too bad in your day to day finances.

  2. So important to start as early as possible and take advantage of compound interest. Even if you start with a small amount and increase it over time. Its advice I’m giving to my three teenage children. I want them to understand the importance of saving and investing early.

    1. I feel like I have that conversation with people all the time and nothing changes. So frustrating. That’s why I pulled out the numbers today 🙂

  3. Haha you use Vanguard’s performance calculation feature too. Only wish it was more robust. I showed my mom her accounts the other day and she asked what happened with the latest dip, and I got to explain what the Brexit was.

    1. haha, definitely a lot more volatility going on in the past year, but still way up in the long run. Long-term game all the way 🙂

  4. Not only are you not gaining as much by saving instead of investing, but factor in inflation, and all that money in your savings account is actually costing you buying power. Unfortunately, a lot of people don’t understand that concept just as they don’t get what compound interest can do for you. If you’re saving for a big ticket purchase (i.e. a house), then yes, I understand throwing huge sums into savings. But having it there just as a safety net (on top of your emergency fund) isn’t the way to go. Love this post!

    1. Exactly! It’s sad when savings can’t outpace inflation, but that’s the reality we live in. Thank goodness we have investing as a tool! It’s just too bad more people aren’t using it 🙁

  5. Great post! I think so many millennials shy away from investing because they think they have to pick stocks or it’s complicated. I started investing in my 401k for the tax deduction years ago. So glad I did!

    1. Agreed. I think most people associate investing with stock picking, risk, and overblown hollywood portrayals of wall street. What they don’t think about is the accessible, low cost and simple 401k contribution or index fund within a ROTH IRA.

  6. Probably the biggest financial mistake of my life was not investing right out of college.

    I waited 5-7 years before I got my act together and started saving/investing, but if I had started earlier those early dollars would now be worth a fortune (25 years later).

    I still did well over the next two decades, but could have done much better if I had started earlier. Don’t put it off!!!

    1. The sooner, the better for sure, but still great you started as soon as you did. I have many peers, now in their 30s, still not investing :/

  7. Great post. Even the smallest amount gets you into the habit, then raise it when you get pay raises.. We should show this post to all young relatives, friends, colleagues who’re on the fence about investing!
    Cheers!

  8. I have some co-workers in their 40s who will openly talk about how they keep their 401(k) in a money market account. They’re so worried about any chance of losing money, but they’ve lost out on so much potential growth in the last five years alone. They probably could have thrown darts at the fund and still have more in their 401(k) then what they have now..

    I definitely grew up in an environment that was on the financial savvy side, but everything I learned about the investing side of finance was through books and the internet after I graduated from college, I wouldn’t be surprised if there’s a lot of other millennials like that because investing talk can still be taboo even in families. I was taught to pay my credit card bills on time and to appreciate the value of a dollar, but investing strategy tips? We definitely were never that kind of family.

    Fantastic post, and I would agree, anyone with a long time horizon should probably be in equities all the way, though I understand the appeal of going with a balanced fund to mask the volatility some, I recently saw a quote that I liked:” sub-optimal plan that can be followed is much better than the the optimal plan that you can’t stick with.”

    Right now, my biggest concern is to figure out how much to pull out of my long term portfolio to keep around as safety with the absence of knowing what sort of income I will be bringing in in addition to dividends after I (temporarily?) pull the W2 plug.

    1. Instead of pulling anything out of the long term portfolio, I would start saving aggressively in accessible, liquid accounts until you feel you have enough to pull the W2 plug. Ideally, your long-term investments are left to grow until retirement.

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