Saving and spending our money wisely does not come naturally to us, as evidenced by Americans' high debt and poor savings rates. However, with the right perspective, managing your money becomes a lot simpler.
Here are six points that will change how you think about money.
1. How $1 became worth more than $2 million
The S&P 500 -- an index that has been tracking the performance of 500 large American companies for more than a century -- gained an average of 10.77% each year between 1871 and 2014. An investment of $1 in the S&P 500 in 1871 would have been worth $2.25 million at the end of 2014.
Taking a more realistic look at the past 40 years, the annualized return of the S&P 500 between 1974 and 2014 was 11.08% -- right in line with the historical average. It's a similar story between 1934 and 1974, when the index turned in annualized returns of 9.49%. Even between 1894 and 1934 -- a period that ended in the middle of the Great Depression -- its annualized returns were 7.32%.
The message is clear: For people with an investing horizon of decades -- which applies to you whether you're fresh out of college or settling into your career in your mid-30's -- you'll be hard-pressed to find an investment vehicle more likely to deliver solid long-term returns than the stock market.
2. The best investments are right under your nose
Oftentimes some of the best future investments are right in front of us in our daily lives. Among the top 15 best-performing stocks of the past decade are Apple (up 1,306%), energy drink juggernaut Monster Beverage (up 2,194%), specialty coffeemaker Keurig Green Mountain (up 2,038%), Netflix (up 2,749%), and online travel deals pioneer Priceline (up 6,190%). There's a good chance you regularly see (or use) the products and services of these businesses, which have delivered astounding gains for patient investors who bought and held shares for 10 years. It will likely be a similar story for the best-performing stocks over the next decade.
The lesson here is that investing doesn't have to be complicated. Stick with investing in an index fund (such as one that tracks the S&P 500) or investing in companies that you know, love, and understand. Thanks to resources like the Internet, consumers are arguably more empowered and informed than ever before.
Your knowledge as a consumer can help you as an investor, too. If you pay attention to products, services, and trends around you, there's a good chance you can make use of your observations and experiences when you're considering whether or not to invest in a company. (Legendary investor Peter Lynch would get investment ideas when he took his family to the mall and saw which stores and products caught their eye.)
If you think buying stocks is difficult, think again. Opening a brokerage account (and funding that account) doesn't take long at all -- and we're here to help.
3. The stock market has a track record of exponentially growing wealth
Let's say you start investing with a lump sum of $1,000 and then routinely invest another $500 each year for the next 30 years. This means that after 30 years, you would have invested a total of $16,000. If you're investing in a low-cost stock market index fund, history shows that over several decades, you can expect to earn an average return of 8% per year or more. Given an average 8% annual return, your $16,000 investment would be worth $71,235.59 after 30 years.
To gain wealth, the single most important thing you can do is invest your money over a period of many years in order to maximize the effect of compound interest. Motley Fool columnist Morgan Housel highlights this with the story of Warren Buffett, one of the wealthiest people in the world:
The key to making compound interest work is sticking around long enough to make it to the end of the chess board. That's where the massive gains are. It's why, of Warren Buffett's $63 billion net worth, $62.7 billion was added after his 50th birthday, and $60 billion came after his 60th.
4. College students face an uphill battle
Thankfully, young people are beginning to think more proactively about college expenses. According to the College Savings Foundation, 51% of high school students are already saving for a college education, and 83% of those savers have already set aside $1,000 or more in 2015.
Although fewer students are planning to borrow to pay for college this year compared to 2014, the College Savings Foundation says 65% of those borrowers need to borrow more than a quarter of their total higher education cost. More than half of these prospective student borrowers are expecting it to take at least six to 10 years to pay off the loans.
And the overall student loan picture isn't getting much prettier. The average class of 2015 graduate with debt has more than $35,000 in student loan debt to pay back, which is a record amount of indebtedness. And 71% of those receiving a bachelor's degree have a student loan upon graduating, a number that has been steadily rising each year and is now at an all-time high.
5. Even after college, we're a nation of debt
According to NerdWallet, of the U.S. households that have debt, the average household credit debt is $15,863. Credit card fees cost the U.S. $90.3 billion in 2014, up from $43 billion in 2004.
Dealing with debt? Take a look at our 60-second guide to getting out of debt.
6. But there's hope
Thanks to the power of compound interest, it doesn't take a lot of money to start investing and grow your wealth until you're ready to retire in comfort. Investing $100 every month for 30 years and earning an average annual return of 7% (below the historical average return of the stock market) will leave you with more than $122,700 after 30 years. To boost that number, you can always save and invest more and/or lengthen your time horizon. Investing $100 a month for another 10 years (so 40 years in total) and earning that same 7% return would more than double your investment to $264,012. As you can see, an extra few years of investing can make a difference of tens or hundreds of thousands of dollars.
Time is your greatest advantage when it comes to investing and ensuring financial freedom over the course of your life. The earlier you start saving and investing and let compound interest take full effect over years and decades, the better off you will be when you hit retirement or need those funds. The amount of money that you start with isn't what counts. Whether you start with $50, $500, or $10,000, it really doesn't matter. The key is to start. It's really that simple.
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