Saving Vs. Investing 101
Saving money is great, but if you’re just throwing your money in a bank account, you may not really be taking advantage of the compounding interest. See, 10 years ago, you were able to get at least 5 to 7% interest in your money market. While that is a fantastic guaranteed interest rate, those rates no longer exist today. Heck, you’re lucky to get anything over 1%! As you probably know, with that kind of interest, you’re really not going to make that much money on your money.
To give you a better idea which one works best for your situation, let’s take a look at the differences between savings and investing:
With savings, your money is going to be extremely safe. With money markets and savings accounts, what you’re going to find is that once your money is in it, you don’t have to worry about losing anything. As long as your money is insured by the FDIC, you can always sleep at night knowing your money will be there the next morning. The downfall, though, can be that you’re not going to earn a high interest rate. In fact, as mentioned above, you will be lucky enough to get 2%.
With investing, there are thousands of ways to invest. While some are risky, some aren’t. For example, investing in a dividend stock such as Johnson and Johnson will be a lot less risky than investing in a penny stock. While you can make the big money investing in smaller companies, it all depends on the game plan that you have. If you’re happy with 5% a year, a dividend stock may be your calling. If you want that 25% a year, you may want to consider those no-name stocks. Remember, though, you want to invest at your own risk!
Investing is a fantastic way to earn 8%, 10 %or potentially 14% a year. These returns can easily be achieved with companies that you have heard of too!
Comparing the Returns
Let’s say that you invest your $10,000 today in a savings account that yields 1.5%. Let’s take that same $10,000 and say you invest it in a dividend yield stocks that yields an average return of 8%. As you can see, these are more than fair numbers.
With the savings, you’re going to have $15,678 in your account 30 years from now. As for the stock, your balance will be at a healthy $109,000! Now, let’s say those stocks yield a 12% each year on average. Your $10,000 would be a cool $359,000 in 30 years! This isn’t adding a penny to your account, either!
As you can see, if you’re willing to take a slight risk, the payoffs are huge. Even if you receive 5% or 6% a year, it’s a lot better than what a savings account can give you. Now granted, these accounts can raise in the future. But in the meantime, if a savings account has an interest rate of less than 4%, you’re better off investing in stocks.
This was a post written by Hannah. She runs Howmuchisit, a resource that helps you find the price on everything. You can reach her on Twitter: @howmuchforit.