Financial security is an essential part of any adult’s life, but for many people, the concept of investing can seem daunting. Particularly when it comes to those with limited savings or those who think their current levels are insufficient to begin investing, a common refrain often emerges: “I don’t have enough money to invest.”
We will delve into why this mindset is flawed and why even the smallest amounts can be a significant starting point for a lifelong investment journey. We’ll address two primary camps of people who think they cannot invest due to low savings levels: those with debts and those without.
The Two Camps
1. Those with Debt
For individuals who have high-interest debts, such as credit cards or auto loans, the idea of investing is understandably inappropriate until they have paid off their obligations. This is because it is extremely challenging to generate a return that will outpace the double-digit interest rates often associated with such debt.
Once you’ve managed to pay off these debts, your attention can shift towards investing, as you are essentially getting a guaranteed savings return equivalent to those debts’ exorbitant interest rates.
2. Those without Debt and Small Savings Levels
If you have a few months’ worth of living expenses saved up in a free checking account or similar liquid account, this is typically all that’s required for emergency scenarios like job loss. It is recommended to keep such money readily accessible in the event you need it to cover your living expenses. However, once you’ve saved a couple (two may be sufficient) months’ worth of emergency savings and there are no looming significant one-off expenses, the time has come to start investing any additional funds.
Now, let’s dive into the top four reasons why you should begin investing, even with limited savings:
1. Inflation Erodes Your Savings Over Time
The average annual U.S. inflation rate from 1913 through 2014 was 3%. This means that your savings’ value is being eroded at a rate of approximately 3% each year on average. To maintain the purchasing power of your money, you need to invest and ensure that your returns keep up with or exceed the inflation rate.
Investing helps mitigate this detrimental impact by allowing your capital to grow over time and preserve its value in real terms. This is reason #1 for making the move into investing: it’s an essential, necessary step towards maintaining a solid financial footing.
2. Investment Returns Beat Inflation Over Time
When your investments generate returns that go beyond just keeping pace with inflation, you enter a compound growth cycle. Think of each share you own as a hardworking employee who is out there “earning” money for you. While these employees may not always perform optimally, they usually deliver results over the long term. This compounding effect creates a snowball-like momentum that can significantly contribute to the growth of your savings.
3. Investing is a Healthy Habit to Develop
If you’re constantly using excuses like “I don’t have enough money to invest,” or variations on this theme, you risk never taking that critical first step into the world of investing. The key is to start somewhere and build from there. Why not begin with a modest sum, such as $500, $1,000, or $2,000, and gradually increase your investments?
Personal experience can be an indicator that once you’ve committed your money to an online brokerage account or similar investment platform, you’re less inclined to withdraw it for any reason other than necessity. In a way, doing so feels like admitting defeat; in another way, the majority of us are simply too lazy to log in and make such transactions. This self-imposed hurdle encourages you to hold onto your investments and nurture them.
4. Keep Your Savings Safe from Yourself
For those who have their savings sitting idly in a checking account, this money is more likely to be perceived as “spendable” rather than the foundation for a long-term financial strategy. By investing these funds, you safeguard them from impulsive spending decisions and can instead allow them to grow over time.
In summary, it’s crucial to recognize that the notion of insufficient savings as an excuse to avoid investing is unfounded. Even small amounts can serve as a launching pad for long-term financial growth, provided you commit to the process and develop healthy investment habits. Don’t let excuses hold you back; embrace the opportunity to nurture your savings and secure a more prosperous future.
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