Often the temptation is there to spend what we earn and delay saving and investing until it feels financially convenient. But the sooner we start investing, the more financial rewards we can reap in the future. In fact, every day we don’t invest, our money is losing potential. (It’s important to remember that investing in the market always poses the risk of loss, including the loss of your entire investment. Make sure you’re ready to invest before getting started.) The key is that money invested can earn compounding interest, creating what’s known as the snowball effect.
Simply put, sending even a small snowball (money) rolling down the hill (earning interest) builds momentum in an important way, and gather more snow (money) at an increasingly rapid pace (compounding). Both positive returns and additional deposits can increase momentum and additional earnings even more, helping you reach investment goals faster. For example, if you invest $300 every month from January to December, rather than delaying and investing the total amount ($3600) in December, you could potentially gain over $100, assuming a 6% annual return.*
If that doesn’t seem like much, the gap grows even larger when you think about investments yearly instead of monthly (which makes sense, since investments are long-term). Even with OpenInvest’s minimum account size of $3,000, the first year you don’t invest you could lose out on $180 (at the same 6% return rate). The next year you could lose out on $191. And the snowball gets bigger.
By investing what you can, earlier and regularly, you can increase your chances of a greater return. While OpenInvest (or indeed any financial advisor) could never promise a guaranteed steady rate of return, the alternative option of leaving your money idling in a low-interest savings (or a no-interest checking) account may do less for your financial future. The longer you wait to start investing, the more likely you are losing out on compounding interest as the market grows.
If you choose to invest with OpenInvest there is great potential to see your money grow while adhering to your values with a diversified, socially responsible portfolio. As soon as you have a few thousand dollars comfortably set aside (OpenInvest has a $3,000 minimum) you’ll be good to go.
Sign up here to find out more.
At OpenInvest we manage a variety of account types including traditional IRAs and Roth IRAs. One of the main differences between a traditional IRA and a Roth IRA is when you are taxed. Contributions to a traditional IRA are fully tax deductible. However, you’re taxed when you withdraw what you have accrued, including the interest.
A Roth IRA allows you to make contributions on taxed income (i.e. not deductible like a traditional IRA). When you eventually withdraw that money though, you will pay no tax. However, only individuals or couples earning below a certain amount are eligible. Consult a tax professional to determine the best account option for your tax situation.
Whether you open a Roth or Traditional IRA, beginning to invest now is crucial, especially with social safety nets at risk for younger generations. As we all know the money, easily accessible money is all too easy to spend. Investing is a great way to resist impulse purchases, add to your nest egg, and form a great savings habit that the ‘future you’ will thank you for.
*6% is a conservative estimate of the average annual return of the stock market over the last century, adjusted for inflation. Historical performance is no guarantee of future performance.