Better Financial Health in 15 Minutes (or less!)

Scared to Invest? Here's what should really worry you

• Stacey Hyde

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Envision Financial Planning. 5100 Poplar Avenue, Suite 2428, Memphis, TN 38137. (901) 422-7526. This communication is strictly intended for individuals residing in the United States. Advisory Services offered through Envision Financial Planning, a Registered Investment Adviser.

Speaker 1:

Hi, I'm Stacey Hyde and I'm back with another episode of Better Financial Health in 15 minutes or less. What I want to talk about today is we live in some pretty scary times. There's a lot of talk about recession, stagflation, what tariffs, what's going to happen, and you may think, well, I need to invest, but I'm scared to invest. You may think, well, I need to invest, but I'm scared to invest. And so what I'm hoping to share with you today is why it's actually scarier to wait, Because the younger you are, the a long time. Basically, throughout, from like 2010 to 2020, we really didn't see much inflation. Interest rates were super low, Prices stayed pretty level, but ever since the pandemic and the supply chain disruptions and the incentives to people the incentives to people it's really caused inflation to tick up, and now we're seeing it in our homeowner's insurance, the price of eggs, everything is just costing a lot more, and so that rate increases.

Speaker 1:

The reason that you need to be investing, not just saving. And I want to separate those out because I think of them in three ways you have saving, and then you have investing, and then you have speculating or gambling, and let me explain what I mean by that. Savings is money that goes into your bank account. This is money for your emergency fund. This is money that you can get your hands on quickly and it's not going to grow a whole lot. I mean, you can help it by using a high yield savings account, which we've talked about before, but it's really safe, steady money. Investing now that is something where you're buying.

Speaker 1:

You've heard me talk about before. If you've been around very long. We're fans of index funds or passive investing where you own the whole market or, like all the large company or all the small companies international stocks, emerging markets where you're owning broad sectors of the market. That is what I consider investing when we start getting into crypto, into picking individual stocks. That is closer to gambling or speculating, because that may pay off really, really well, but you may lose everything. Whereas if you stay in one of those broad-based investments, yes, some of the companies are going to do great and some of them are going to do terrible, but overall you're going to do just fine because you're taking the risk of the market and history shows us that the markets do well over time. In the short term, it can be up and down and all over the place, but if you step back and look over a longer term, your chances are you're going to do well. And what do I mean by longer term? I'm talking five to 10 years, so you could have several years in a row of bad markets. We really haven't had that since. You know, late 07, all of 08 was awful and then in March of 2009, the market bottomed out. We've had some short-term pain, like early on in the COVID. Markets were off huge, like 20% in a couple of weeks, and then in 2022, markets were also down. But we haven't really had any prolonged downturn and markets could do that and likely will do that again. So that's why it's important to have your cash reserves in case something goes haywire.

Speaker 1:

But I want to just give you a couple of numbers to think about, why it's important to start early. So say you, for whatever reason, maybe you got a big tax refund this year and you have $5,000 and you invest it until you're 65. If you put it in the market and assume a pretty conservative for equity investments of 7% rate of return, your value at age 65 is over $53,000. Is over $53,000. If you put that same $5,000 in your bank account and you didn't monitor the interest rate. So say you average 1%, that's going to be only worth $7,000. That's a huge difference. Now if you're 40, the difference is not as great. It's $27,000 from 40 to 65 at 7%. So you basically have $22,000 worth of growth. If you put that same money in that 1% savings account, it only grows to $6,400. That's a huge difference.

Speaker 1:

But let's think about if you're trying to save on a monthly basis or invest on a monthly basis and you put $250 a month into an IRA, a Roth IRA or just an after-tax investment account. That same investment $250 a month from age 30 to age 65 at 7% is going to grow to $427,000. Now if you do that but you're too scared to take any risk I don't want any risk, I'm just going to put it in savings you're only going to have $125,000. So you would have $302,000 more by investing in that risky stock market. You could have a lot more than that. It could be less. But history says if you put it in there and you leave it alone and you just let it grow and you ignore it, it's going to work out for you. To give you a comparison if you started at 40 doing that same 250 a month, it's only going to grow to almost $196,000. So by starting early, at 30 versus 40, you're going to have $233,000 more at 65, just by starting 10 years earlier. That's the power of compound interest and what compound interest is and the reason it's so huge is you're earning interest on interest on interest and it just grows exponentially over time. So that's why it's really really important to start early.

Speaker 1:

You know, the easiest way to do it for most people is to take advantage of their employer's retirement plan. The younger you are, the more valuable I think using the Roth option in your 401k is. If that's available to you. You'll still get matching dollars if you contribute to a Roth versus a pre-tax. Now, any money your employer puts in, that's always going to be pre-tax money you put in. Most employers these days give you the option of contributing to pre-tax or Roth.

Speaker 1:

My personal opinion is if you're under 40, you definitely want to, if not do all Roth. You want to use some Roth because what you put in will be a small part of what your balance is at retirement. So you want to take advantage of that time. Now, as you get older and closer to retirement, you don't have as much to compound, so pre-tax may work better for you, but you don't need a lot of money to get started. If you don't have $250, start $25. That's why a 401k works well, because you can do a small amount, a percentage.

Speaker 1:

But I also think it's great to save outside of your retirement plan because then you're not subject to early withdrawals if you're not 59 and a half and penalties and that sort of thing, and you can pay potentially lower capital gains taxes when you sell something that has done well instead of ordinary income. You don't have to be perfect, you just need to get started. And if you're overwhelmed with the options, you know S&P 500 index, a total market index that's even better because it's going to pick up some of the smaller companies A global stock index account. Or if you're in your employer's plan, chances are they have a target date fund or some sort of default investment. That's probably going to work just fine for you.

Speaker 1:

So don't overthink it, Just do it. Overthink it, Just do it. Try not to worry about it, because study after study has shown that the more we look at our accounts, even in good times, the worse we do, because we're tempted to touch it or withdraw or change something up, because one of the things in our mix is not doing well, so we want to get out of that. If you've done that last year and dumped your international stocks, that's the best performer this year, because that's what markets do is they rotate around from one outperforming to another outperforming. So the future's there for you. Just start. And if you're late, if you're listening to this and you're like, oh Lord, Stacey, I'm over 40. Get started. The best time to start was always yesterday. The next best time to start is today. So go ahead, open that account, increase those 401k contributions and save your future. Self will thank you. Thanks for tuning in. This has been another episode of Better Financial Health in 15 minutes or less.