When you’re saving up for a big goal, no matter what it is, it’s tempting to stop there: save your money, and don’t worry about investing.
But over time, especially when that time is measured in years, the returns you’ll get from investing your money may outpace the interest you’d earn if you left your money in a savings account. And the faster your money grows, the sooner you may reach your goals.
The question becomes, why don’t more people take advantage of an investing account over a traditional savings account?
There are some big misconceptions out there about saving and investing so let’s break them down.
Myth #1: You can’t lose money in a savings account
Depending upon what you’re saving for and how soon you’ll need the money, you can in fact “lose” money with a savings account.
Let’s say that ten years ago, you set a goal to save up $10,000 for a dream vacation. This year, you finally reached that goal. But when you go to buy plane tickets, you realize they’re more expensive than you had planned. And so is the rest of your trip.
That’s because over the past ten years, inflation occurred. Prices went up. And the interest you earned on your savings didn’t keep pace. And according to the Department of Labor’s inflation calculator, the $10,000 vacation you planned and saved for will now cost you $11,509.
So, you need to be sure your money’s earning enough interest to, at the very least, keep up with inflation. And it’s very rare to find a savings account that pays that much interest. That’s where the stock market comes in.
Historically, the S&P 500 (an index that tracks the biggest 500 stocks in the US) has returned 9.65% annually on average since 1928. Making investing in the stock market one of the best ways to potentially stay ahead of inflation, and not lose purchasing power in a savings account.
Myth #2: All investments are high risk
True, investing in stocks does come with some risks. And a 9.65% average annual return in the past doesn’t mean you’re guaranteed to earn that in the future. But there are many other ways to invest your money that may help balance your risks with your returns.
For example, the historical annualized return of a 10-year treasury bond (an investment backed by the US government, and generally considered to have low risk) is 4.88%. A much higher return than you see on savings accounts but less than you may get from a stock. That’s basically how most investments work: there’s a trade-off between the amount of risk you’re willing to take, and the potential returns you’re going to earn.
Generally speaking, if you’re comfortable with more risk, you have a chance to earn higher returns over time, but you don’t have to take a lot of risk to invest your money. You can always create a balanced portfolio or create an overall low-risk portfolio if that fits your goals and your comfort level.
Myth #3: Investing is (very) expensive
It doesn’t take as much money as you might think to start investing. In fact, there are a number of affordable options available to you these days. Investments are typically priced on a percentage basis, called a management expense ratio (MER). Beyond the traditional mutual funds and managed accounts charging 1%, 2% or more of your overall account value to build a diversified portfolio, there’s a wide range of digital portfolios and discount brokerage offerings that charge less than 1%.
The key to reaching your goals through investing is the same as you would with a savings account: consistent deposits (investments) on a regular, ongoing basis.
This material is not meant as investment advice and is for informational purposes only. Please consult a financial professional before making any investment decisions.
Financial planning and investment advice provided by John Hancock Personal Financial Services, LLC (“JHPFS”), an SEC registered investment adviser. Investments: not FDIC insured – No Bank Guarantee – May Lose Value. Investing involves risk, including loss of principal, and past performance does not guarantee future results. Diversified portfolios and asset allocation do not guarantee profit or protect against loss. Nothing on this site should be construed to be an offer, solicitation of an offer, or recommendation to buy or sell any security. Before investing, consider your investment objectives and JHPFS’s fees. JHPFS does not provide legal or tax advice and investors should consult with their personal legal and tax advisors prior to purchasing a financial plan or making any investment.