For most of us, $250 is no small chunk of change. But sadly, that doesn’t look like much next to our monthly bills, which are usually in the thousands of dollars. And it looks even smaller next to the hundreds of thousands, if not millions, of dollars we plan to spend in retirement.
But if you don’t need the $250 right now, there’s an easy way to turn that money into a much bigger sum that will go a lot further in the future. Here’s how.
It’s easier than you think
Investing your money is the easiest way to make it grow over the long term. All you have to do is open an investment account and decide what to invest in. Then you just need to leave your money alone for a while and check back periodically.
How much you earn depends on several factors, including how long you leave your funds invested and what type of return you earn during that time. But the stock market has averaged returns of around 10% per year over the past 50 years, so there’s a good chance you’ll make a decent profit even by investing small amounts.
If you made a one-time investment of $250 and it generated an average annual rate of return of 10% over 30 years, it would be worth $4,362, or more than $4,100 more than the original amount. But if you really want your money to grow, regular contributions are essential.
Investing $250 a month with an average annual rate of return of 10% leaves you with almost $520,000 after 30 years, despite only contributing $90,000 of your own money. That’s a profit of $430,000. And if you’re able to set aside more money per month or leave your money invested longer, you could end up with a lot more.
Of course, returns on investment are never that linear. You will likely have years where you make more than 10%, others where you make close to or even a little less than that, and some years where you lose money. But it’s important to focus on the long term when investing.
If you have money that you plan to spend over the next five to seven years, it’s better to keep it in cash than risk losing it. Only invest funds that you don’t need to withdraw in the near future to give them the time they need to grow.
How to start investing
A retirement account is a great place for most people to store their long-term savings. These offer tax benefits that taxable brokerage accounts do not. However, they also come with limitations. In most cases, you can’t access retirement account funds until age 59.5 without paying a penalty, so don’t keep funds here that you plan to spend earlier.
You may already be investing through a 401(k) offered by your employer. Or if you don’t have access to any of them, you can open an IRA. You’ll have the choice between traditional IRAs, which give you tax relief upfront but require you to pay taxes on your withdrawals later, or Roth IRAs, which offer tax-free withdrawals in retirement if you pay taxes on your dues when you make them. Usually, Roth IRAs are the smart choice, unless you think your income will drop significantly once you retire.
What you invest in is up to you. Index funds are a great option if you’re new to investing and want to quickly diversify your portfolio. These give you a stake in hundreds of big companies with a single purchase, and they’re also known to be quite affordable. Most people only pay a few cents to a few dollars a year to own one.
You can also build your own stock portfolio, but you must aim for at least 25 different companies across multiple industries. This will help reduce the impact on your portfolio if one of your stocks goes down.
If you’re unable to invest right now or can’t invest as much as you want, see if you can take steps to generate more income. This could involve working overtime, starting a side hustle, or looking for a better-paying job elsewhere. The earlier you start, the longer your investments will need to grow.