It's a common misconception that you need to have a lot of money to start saving for retirement. In fact, among workers who have no retirement savings, the primary reason they aren't saving is they don't think they're earning enough money to do so, a survey from GOBankingRates found.
That's an understandable sentiment, considering retirement is becoming more and more expensive. If you know you need to save hundreds of thousands of dollars (or possibly more than $1 million) for retirement, it can seem pointless to stash anything away now if you're struggling to save.
However, small investments now can result in a robust nest egg later. Even if you're starting with as little as $1,000 to invest, you can achieve a significant amount in savings if you have a financial strategy in place.
Step 1: Invest in the right places
If you're strapped for cash and don't have much to invest for the future, it's vital that your money is working as hard as possible. The key is to avoid simply saving your money; rather, you'll need to invest it.
Investing your money in the stock market can seem like a risky move, but it's one of the best ways to see your earnings skyrocket over time. Stashing your cash in a savings account, certificate of deposit, or other "less risky" account might seem safer, but you'll likely only be earning a 2% to 3% annual return on your money. By investing your money in the stock market, although there will be ups and downs over the years, you'll typically see returns of anywhere from 6% to 10% per year.
So, say you have $1,000 to invest right now. If you were to stick it in a high-yield savings account earning an interest rate of 2% per year and let it sit untouched for 20 years, you'd end up with $1,486. While you're still a few hundred dollars richer than you were before, those are pretty depressing earnings. However, if you had invested your $1,000 while earning an 8% annual return, after 20 years you'd have around $4,661.
The trick to investing wisely in the stock market is to limit your risk while still earning relatively high rates of return, and the best way to do this is to invest in low-cost index funds and mutual funds. These are large collections of stocks, so when you invest in an index or mutual fund, you're actually investing in dozens or even hundreds of different stocks at once. This allows you to still achieve higher rates of return, yet with limited risk because you're diversifying your investments.
Investing in the right places is only step one of a smart investment strategy, though. The other half of the equation is ensuring time is on your side.
Step 2: Start investing early
The earlier you begin investing, the easier it is to grow a nest egg worth hundreds of thousands of dollars. That's because when you have decades to save, compound interest is on your side. Compound interest allows you to essentially earn interest on your interest, so the bigger your retirement fund gets, the faster it will continue to grow.
In this scenario, say you invest your $1,000 and are earning an 8% annual rate of return. If you don't make any additional contributions and let your money grow for 40 years, you'd have around $21,725. But if you were to let it grow for 45 years, you'd have nearly $32,000 total.
Of course, no matter how frugal you are, you can't retire on just $32,000. But if you make small contributions to your retirement fund each month and let compound interest do its thing, you can achieve significant results.
For example, say you're 30 years old and you invest $1,000 right now earning an 8% annual return. Let's also say you continue investing $150 per month for the next 35 years. At that rate, you'll have around $325,000 saved by age 65. Save just $50 more per month, though, and you'd have around $428,000 stashed away, all other factors remaining the same.
The key takeaway here is that you don't have to be rich to save hundreds of thousands of dollars for retirement -- you just need to take advantage of smart investment strategies. Even if you only have $1,000 to save, if you invest in the right places, start investing early, and continue saving what you can every month, you can build a healthy nest egg by the time you reach retirement age.