If you’ve ever read a personal finance book or blog, eventually you will get to a chapter or post on investing. That’s because when a lot of us think about personal finance we initially think about this overwhelming topic. Some of the main topics covered and debated online include what average return we should expect, how much we should be investing each month, and also what we should invest in (bonds vs. single stocks vs. mutual funds vs. index funds).
If you look at the comments of any blog post on investing or look at critiques of those who have written books on the topic you see responses such as you can’t expect to get 12% annual return on a mutual fund, Fee-only financial advice is the only way to go, and passive managed index funds are better than mutual funds. While there may or may not be some validity to these points, these heated discussions often make those of us who are trying to learn about investing confused, overwhelmed, and ultimately gun shy to start investing and so we keep putting it off.
With that being said, I decided to do an experiment and run some numbers. I wanted to find out what would happen if we invested $400 a month, which is about 10% of the median salary of $50,000, earning various rates of return. I wanted to know how much we would have at various points of time. Using a calculator from Bankrate.com I came up with the following results:
Obviously the higher rate of return, the more money you’ll have at the end. But notice what happens when you sit on the sidelines and do no investing. You get zero every time! No matter what the rate of return is, no matter how much is contributed, no matter what the asset allocation was, the result was the same; no investing equals no money.
Granted, that’s an extreme example. I’m not a retirement planner. I’m not trained or experienced enough to recommend certain funds, asset allocations, or expected rate of return. Although I do have my own thoughts and things I keep in mind when managing our family’s finances. But the most important thing when it comes to investing is to actually start. If you do find out you have the wrong allocations or the wrong choice of funds you can always change it later, but you can’t go back in time and invest. Even investing in something basic is better than doing nothing.
If you find the topic of investing confusing, boring or overwhelming, join the club. You aren’t alone but investing is an important part of a healthy financial plan. Once you are in a position to invest, consider opening an IRA on your own at one of the many online brokers or think about looking at working with a professional who will help teach you. Doing one of those things will be one of the best investment decisions you can make.