Saving for the future isn't just a matter of putting money aside each paycheck and calling it a day. While committing to saving money is definitely a good start, if you don't invest that money wisely, you risk coming up short by the time retirement rolls around.
It turns out that more than half of us are missing out on a major opportunity to grow our savings. According to a study by Bankrate, over 50% of American adults have no money invested in the stock market. And while avoiding stocks makes more sense for older Americans approaching retirement, younger savers should be capitalizing on the growth stocks offer -- but they're not. In fact, Bankrate found that only a quarter of adults under 30 are buying stocks. But while investing in stocks is indeed riskier than leaving money in a savings account, there's a danger to the latter approach too.
Why Americans aren't buying stocks
So why are so many of us avoiding stocks like the plague? A big part of it boils down to fear. While there's no such thing as a risk-free investment, the stock market in particular is known for its perpetual volatility.
But in reality, if you employ the right investment strategy and choose the right stocks, there's no reason to fear the stock market at all. First of all, the stock market has a strong history of rebounding. Between 1965 and 2015, the S&P 500 underwent 27 corrections of 10% or more, and guess what? It recovered every time. If you put money in stocks with the goal of cashing out your investments in a year or two, then yes, you stand a pretty good chance of losing money. But if you're willing to invest for a decade or more, you'll have time to ride out the market's ups and downs to ultimately come out ahead.
Another reason Americans tend to stay away from stocks is that they feel they don't know enough about investing to get in the game. In reality, you don't need to know a whole lot about stocks to do well as an investor. If you stick to index funds, which simply follow existing indexes like the S&P 500, as opposed to buying individual stocks, you get automatic diversification without the guesswork. Remember, even the so-called experts aren't always successful in picking the best investments, so you certainly shouldn't let your lack of knowledge hold you back.
A real opportunity for growth
So just how much money are you potentially losing out on by avoiding the stock market? Let's run some numbers and see.
Imagine you're 30 years old and your goal is to retire at 65. Let's also assume that you're a strong saver who puts $500 in the bank every month. Now if you leave that money to sit in a savings account paying 1% interest (which, by the way, some of today's banks aren't even hitting), over the course of 35 years, you'll grow your savings to roughly $250,000 -- not too shabby. But watch what happens if you invest that money in stocks instead and score an average yearly return of 8% on your investments (which is actually a bit below the market's average). In 35 years, you'll have $1 million to your name!
Even if you split your savings down the middle, investing half in stocks and keeping the other half tucked away in a savings account, over the course of 35 years, you'll still come away with about $500,000. And while that's not a move I'd recommend for someone as young as 30, it's a decent compromise if you're the type who's really, really terrified of losing money in stocks, even if just on paper.
If you're already over the hump of saving money, don't sell yourself short by locking your cash away in a savings account. Investing in stocks offers a real chance to grow your money into a sizable retirement nest egg, and the sooner you start, the more you stand to gain.