I often hear women in their 20s and early 30s say they don’t have enough money to start investing.
I don’t believe it!
I believe everyone has enough money to start investing as long as they make it a priority.
Unfortunately, most women at this age do not make investing a priority because they don’t really understand how it can help them in the long run. Mint offers an investment growth calculator that can help give them an idea of how much investing can help them reach their financial goals.
You see, investing in the stock market allows you to potentially grow your money at a higher rate than a savings account.
And if you can grow your money faster than a savings account can, then over time you’ll have a lot more money for your various financial goals.
How, you ask?
Well, because compounding interest will be working in your favor. The best way to explain how compounding interest works is to understand the “Rule of 72.”
The Rule of 72 is a great financial rule of thumb that basically tells you how many years it will take to double your money, given a specific interest rate.
For example, if you have $10,000 and want to know how long it will take to double your money at a 2% interest rate, divide 2 into 72 and you get 36 years.
If you take the same $10,000 and instead use an 8% interest rate, it will take nine years to double your money because 72/8=9.
(I don’t know about you, but I prefer nine years over 36 years!)
The more time you have to grow your money, the less money you need, because compounding interest will be hard at work for you.
Here are some other tips to help you understand investing once and for all…
The Rule of 115
Divide 115 by your rate of return to calculate how many years it will take to triple your money.
For example, if you have $5,000 today earning an 8% rate of return, you will have $15,000 14.4 years from now, and $45,000 28.8 years from now.
This helps you understand the power of compounding interest and why it is critical to invest for your financial future.
Diversify, Diversify, Diversify
In life it’s important to not put all your eggs in one basket, and the same in true with your investments.
One of the best ways to manage the risk of investing is to diversify your money across many different types of asset classes– i.e. large-cap stock, small-cap stock, emerging stock or bonds.
That way, if one asset class performs poorly in any given year, there’s a chance that another asset class will perform well and balance out your losses.
This helps smooth out the volatile roller coaster of investing, which will help you stay invested over the long haul.
Timing the market is impossible!
Frequently switching your investments, or buying and selling often to try to get in and out of the market at the so called “right time,” can really hurt your investment returns.
Studies show that when investors do try to time the market, historical data suggests that they both ratchet up risk and lower risk at just the wrong times.
Get this: from Dec. 31, 1991 to Dec. 31, 2011, the S&P 500 index had an average annual return of 7.81%.
So if you had $10,000 at the start of this timeframe and left your money fully invested, by Dec. 31, 2011, your account would have grown to $45,032.
If, however, you tried to time the market and missed out on the 10 best trading days during that same time period, your average annual return would have decreased to 4.13%, which equates to having only $22,474.1
Investing in Mutual Funds
A mutual fund is an investment vehicle that is made up of a pool of funds collected from many investors for the purpose of investing in securities such as stocks, bonds, money market instruments and similar assets.
In regular speak, you invest in one mutual fund and that mutual fund invests in lots of different stocks, bonds or money market investments.
So right away you diversify your money across various companies, which can help reduce your risk.
Dollar-cost averaging is a fancy way to explain one of the easiest investing principles you can follow.
When you dollar-cost average, you are investing a set amount of money every month regardless of what is going on in the stock market.
For those of you investing in a 401k every pay period, you are already practicing dollar-cost averaging.
By doing this, you can buy more shares when the prices are low and less shares when the prices are high. Over time, this should result in a lower cost per share.
So, for those shoppers out there, it’s like buying more when things are on sale and less when things are full price, which should also be your goal with investing.
J.P. Morgan Asset management using data from Lipper.
The Rules of 72 and 115 are mathematical concepts and do not guarantee investment results or function as a predictor of how an investment will perform. They are an approximation of the impact of a targeted rate of return. Investments are subject to fluctuating returns and there is no assurance that any investment will double or triple in value. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
Brittney Castro, CERTIFIED FINANCIAL PLANNER™, entrepreneur and personal finance expert for women, is the Founder & CEO of Financially Wise Women, a Los Angeles based financial planning firm for women. She specializes in working with busy professional and entrepreneurial women who are passionate about life and want to gain clarity around their money. Brittney’s mission is to help women plan and create the life of their dreams, free from anxiety about money. She is known for her innovative, non-judgmental, compassionate approach to financial planning. She has been featured in the Wall Street Journal, New York Times, CNBC, Financial Planning Magazine, Investment News, and Registered Rep Magazine. Away from the office, you can find Brittney working out, drinking green juice, reading, playing at the park with her dog Arya and of course dancing. Sign up to receive your Financially Wise Toolkit jam packed with great tools and resources to help you on your financial journey at www.financiallywisewomen.com. Follow her on twitter at www.twitter.com/brittneycastro.