Investing in the stock market can seem complicated and confusing, but it's not as difficult as it looks. Even if you're a novice investor, it is possible to make a lot of money with the right investing strategy.
One of the keys to successful investing is patience. It can take years or even decades to see substantial returns. However, thanks to compound interest, the longer you leave your money alone, the faster your savings will grow.
Compound interest is an incredibly powerful tool, and it can help you save hundreds of thousands of dollars or more -- even if you can't afford to save much each month.
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Compound interest in action
The beauty of compound interest is that it has a snowball effect on your savings. You're essentially earning interest on your interest, and your savings will start to add up quickly.
Say, for example, you're investing in your 401(k) or IRA and earning an 8% annual rate of return on your investments. Let's also say you're saving $300 per month. Here's approximately how much you'd have saved depending on how many years you allow your money to grow.
| Number of Years | Total Savings | Number of Years | Total Savings |
|---|---|---|---|
| 5 | $21,100 | 25 | $263,200 |
| 10 | $52,200 | 30 | $407,800 |
| 15 | $97,700 | 35 | $620,300 |
| 20 | $164,700 | 40 | $932,600 |
Data source: author.
During the first few years after you start saving, your money grows relatively slowly. But after you've been saving for a few decades, your savings will start growing exponentially.
Keep in mind, too, that these calculations assume your savings rate remains consistent. In other words, you don't need to save more per month to see your overall savings climb. All you have to do is save consistently and be patient as your money grows.
Getting started investing
One of the easiest ways to begin investing is to contribute to your 401(k) or IRA. This is a fantastic option for those who want to invest in the stock market but aren't quite ready to start picking individual stocks.
There are several advantages to investing in a retirement account such as a 401(k) or IRA:
- You don't need to choose stocks: Many retirement accounts offer a variety of mutual funds or target-date funds to choose from. It's hard to go wrong with these types of funds, and you don't need to worry about buying or selling investments or choosing stocks.
- You can set up automatic contributions: With a 401(k), you may be able to have a portion of your paycheck transferred directly to your retirement account. If you're investing in an IRA, you can set up automatic transfers from your bank account to your retirement fund on the schedule you choose. With automatic contributions, it's easier to save consistently without even thinking about it.
- You can earn matching contributions: Many 401(k) plans offer employer matching contributions, which are essentially free money. Depending on your salary and how much your employer chooses to match, you could potentially earn thousands of dollars per year in matching contributions.
No matter how you choose to invest, giving your money plenty of time to grow is key. The longer you wait to get started, the harder it will be to catch up later. So even if you feel like you can't afford to invest, saving even a little every month can help your money go further than you may think.
