For most of us, $250 is no small part of a change. But unfortunately, this does not appear to be next to our monthly bills, which are usually in the thousands of dollars. And it looks even smaller than 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 is a simple way to turn that cash into a much larger amount that will go much further in the future. Here’s how.
It’s simpler than you think
Investing your money is the easiest way to grow it in the long term. All you have to do is open an investment account and decide what to invest in. Then, 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 money invested and what kind of return you earn during that time. But the stock market has had an average return of about 10% per year for the past 50 years, so there is a good chance of earning a decent profit even when investing small amounts.
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If you invested $250 once and got an average annual rate of return of 10% over 30 years, it would be worth $4,362 — or $4,100 more than you originally started with. But if you really want your money to grow, regular contributions are key.
Investing $250 per month with an average annual return of 10% leaves you approximately $520,000 after 30 years, despite only contributing $90,000 of your own money. That’s a profit of $430,000. And if you are able to save more money per month or leave your money invested for a longer period, you could end up with a lot more.
Of course, investment returns are not that linear. You’ll likely have a few years where you earn more than 10%, some where you earn close to or even slightly less than that, and a few years where you lose money. But it is important to focus on the long term when investing.
If you have money that you intend to spend for the next five to seven years, it is better to keep it in cash than to risk losing it. Only invest money that 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 store their long-term savings. These offer tax benefits that taxable brokerage accounts do not. However, they also come with limitations. In most cases, you can’t access retirement account money before age 59 and a half without paying a penalty, so don’t keep any money here that you plan to spend sooner.
You may already be investing through a 401(k) provided by your employer. Or if you don’t have access to one of these, you can open a file Irish Republican Army. You’ll have a choice between traditional IRAs, which give you tax exemption up front 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. Roth IRAs are usually the smart choice unless you think your income will drop significantly once you retire.
As for what to invest in, that is up to you. index funds They are a great option if you are new to investing and want to diversify your portfolio quickly. This stake gives you a stake in hundreds of top companies with a single purchase, and it’s known for being affordable too. Most people only pay a few cents to a few dollars a year to own one.
You can also build your own stock portfolio, but should target at least 25 different companies in several sectors. This will help reduce the blow to your portfolio if any of your stocks go down.
If you are not able to invest now or cannot invest as much as you would like, see if you can take steps to generate more income. This might include working overtime, starting a side hustle, or pursuing a higher paying job elsewhere. The earlier you start, the longer your investment will grow.
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