How much is $25 worth? That might seem like a stupid question, but I hope by the end of this article, it's not. It could be worth a tank of gas or a dinner out at a restaurant -- whenever we can eat out again. Or it could be a fractional share in a valuable stock, or a mutual fund, or a little extra to pad your retirement savings.
There isn't a wrong answer, but if you're trying to grow your wealth, investing that $25 is definitely the wiser way to go, as I explain below.
How $25 a month can turn into $60,000 or more
Say you saved $25 a month for 40 years. That's $12,000 of your own money. If you left that money underneath your mattress at home, it's never going to be worth more than that. Plus, over time, inflation will slowly drive costs up, meaning your money won't go as far in the future as it does today.
You could counter that to some extent by placing the money in a high-yield savings account. If you earn an average 1% APY over those 40 years and never withdraw any funds, you'd end up with about $14,700, or about $2,700 in interest on top of your initial deposit. That's not bad, but you could do a lot better if you invested that money instead.
If you earn an average 7% annual rate of return over those 40 years, you'd end up with close to $62,000. That's about $50,000 more than what you started with. Of course, this assumes a lot of things, like the fact that your investments consistently grow over a 40-year period, but it gives you some idea of the effect investing can have on your savings over time.
You're not going to retire on $60,000, so realistically, you'll have to save quite a bit more than $25 per month if you ever hope to leave the workforce. But there are some simple strategies you can use to get the money you need while minimizing how much you must contribute on your own.
The most important thing you can do is start investing right away. The earlier you begin, the more time you give your savings to grow in value before you need to draw upon it. Starting later forces you to save more each month because you won't be able to count on as much in investment earnings.
You can also grow your wealth more quickly by choosing the right investments and the right investment accounts. Here's how.
How you can start investing
The best place for most people to begin investing is their retirement accounts. These accounts either offer you a tax break today, if they're tax-deferred, or give you tax-free withdrawals in retirement, if they're a Roth account. Either helps you keep more of your savings.
You might be eligible for a 401(k) through your employer. These accounts enable you to contribute up to $19,500 in 2020, or $26,000 if you're 50 or older. Your employer usually gives you a few investment options to choose from, which can be a good or bad thing. It's useful if you're overwhelmed by the sheer number of options you have with an IRA, but it can also be a problem if your employer doesn't offer any investments you like.
A 401(k) also charges fees, which vary depending on your company and what you're invested in. These can eat into your profits, but you may get a company match that offsets this. A 401(k) match is basically a bonus you only get if you put money into your retirement account, and it's worth taking advantage of if you can afford to do so.
If you're not eligible for a 401(k), or your plan charges fees in excess of 1% of your assets per year and doesn't offer a match, consider an IRA instead. Anyone can open one of these at any broker, and you have a lot more freedom to decide how you're going to invest your money. But you're limited to just $6,000 in contributions in 2020, or $7,000 if you're 50 or older.
When it comes to what you invest in, make sure you keep your money diversified and your fees low. Index funds are one great option. These are mutual funds -- bundles of stocks and bonds -- that passively track a market index, meaning that when the index does well, so do you. They're also known for having pretty reasonable fees.
If you'd like to invest in stocks but don't have a ton of cash to spare, consider investing in fractional shares of many companies rather than pouring all your savings into one or two full shares of an expensive stock.
Ideally, you should choose how much to invest based on how much you think your retirement will cost. If you're not able to save this much right away, just save as much as you can -- even if it is just a few dollars per month -- and try to cut back spending and increase your income by seeking job promotions at work or working side hustles to enable you to contribute more in the future.