Why you Need to Start Investing (Even in Small Amounts)
“How can I possibly invest when I am only able to save $100 (or $200, $300, etc.) per month?!” or “I only have $2,000 in savings – not enough to invest” are variations of the most common objections I hear.
When I’ve dug further, I’ve found that here are usually two thoughts that lead to the apprehension:
- they think they don’t have enough to invest for it to make a difference or to be investing in the first place
- they think that trading fees will be too excessive for the amount they have to invest
Both can be easily overcome. In this post, we’ll discuss overcoming the first sentiment.
“I Don’t have Enough Savings to Invest”
Let’s break those who are saying this down into two camps:
Those with Debt
If you have significant high-interest debts (i.e. credit card, auto loan, etc.), you are correct, you should not be investing. This is an emergency situation and any savings should go directly towards paying off that debt immediately.
Why not invest when you have debt?
It is extremely difficult to earn a return every year that will exceed the 20%, 10%, or even 7% interest rates that plague your debt.
Pay off the debt, and you are getting a guaranteed savings return equivalent to that debt’s interest rate. Guaranteed returns that high in the investment world are non-existent.
Once you’ve paid off your debts, then you can start thinking about investing.
Those without Debt and Small Savings Levels
If you have a few months of living expenses saved up in a free checking account somewhere, that is all you really need for emergency scenarios, like a job loss. You want liquid (quickly accessible) money in the event you should need it to cover your living expenses.
Once a few (2 is probably sufficient) months of emergency savings are squared away in a checking account and you don’t have any huge one-off expenses coming up, you should start investing subsequent savings.
Here are 4 reasons why you should start investing, even when you have little savings:
1. Inflation is Eating your Savings
If you don’t invest, the value of your money is being eroded over time with inflation.
The average annual U.S. inflation rate has been 3% from 1913 through 2014.
That means 3% of your saving’s value will be lost each year, on average.
Investing is the only way to overcome inflation’s detrimental impact over time. This is reason #1 why you should be investing – it is a necessity.
2. Why Not Put your Money to Work for you?
When your investment returns go beyond keeping up with inflation and beat it, your savings grow at a compound rate.
Think of every share you own as an employee who is going out and working for you. Sure, these employees may occasionally let you down, but over time, they usually get the job done. Eventually they start hiring other employees to join them – that’s called “compounding”.
3. Healthy Habits have to Start Somewhere
Getting in the habit of investing is healthy to develop. If you are constantly using “I don’t have enough to invest” or similar chirping complaints as an excuse to not invest, you will NEVER start investing.
Every beginner investor has to start somewhere. Why not start with $500, $1,000, or $2,000 and move up from there?
4. Keep your Savings Safe from their Biggest Threat
Speaking from personal experience, once you contribute your money to an online broker, you don’t want to pull it out for any reason other than necessity. In a way, to do so is admitting personal defeat. In another way, most of us are too lazy to log in to our accounts to do it.
For most people, if savings are just sitting in a checking account, that money is usually looked at as “money to be spent”.
Keep your savings safe from yourself.
Investing with Small Savings Discussion:
- Have you started investing with small savings? How did you get over your fears?
- If you have smaller savings levels, what is holding you back from investing?
- If you are an experienced investor, what tips do you have for those starting out?