Disclaimer: This is not professional financial advice. However it provides ideas on how you can get started with investing and make sound investment decisions.
Investing is critical to maximizing the amount of money you have over time. Mutual funds can grow up to 20% annually (though usually between 6% and 15%), while the interest rate of savings accounts (at least in the US) are only 1% or less, and 1% is actually pretty high. A lot of banks have interest rates of 0.05% or less. (We’ll cover checking and savings accounts in Lesson 3.)
Check out what happens when you invest $1000 per year in a mutual fund that grows at 8% annually versus putting $1000 per year into a savings account with an interest rate of 0.05%.
After 20 years, you will have invested $20,000. But with a mutual fund where your money grows 8% each year, you’ll more than double your money after 20 years. Whereas with a savings account with a 0.05% interest rate, you’ll make a whopping $100. Whoop-dee-doo.
You can play around with this spreadsheet to calculate how much money you’ll have after x years under a specified interest rate and amount you invest or save per year. Columns C and D allow you to compare the difference between how much you’ll have under different interest rates. Simply change the % in cells C1 and D1. You can also change the amount you’ll save or invest per year. For example, if you invest $5500 per year in a mutual fund that grows 8% annually, after 20 years you’ll have invested a total of $110,000 but have approximately $271,826. (And if this investment is in a Roth IRA, it will grow tax-free! More on saving for retirement in Lesson 4.)
The video below explains how figures in the spreadsheet are calculated and how you can use it.
Okay, that sounds all well and good, but you may have three questions:
- How do I know that a mutual fund I choose will grow 8%?
- Which mutual fund should I choose?
- How do I invest in a mutual fund?
I’ll answer them one by one.