After 3 years of basically squandering my money on some pretty useless things I’ve just recently started looking into planning for savings, retirement, kids, and other things that need money and pop up along the way. During my research I’ve found quite a number of people that will project how much money you’ll have when you finally cash out on your investments and enjoy retirement. None of the numbers I’ve seen account for inflation and so none of those numbers show you the actual worth of your money as compared to numbers with which you’re familiar. The purpose of this post is to show why investing is important in a realistic way. I’m not going to say put $10,000 in a decent investment and you’ll be a millionaire by the time you retire! What I am going to say is that the earlier you invest, the earlier you might be able to retire (assuming you plan your date of death properly!). So with out further adieu here’s why you should invest in numbers that you can actually compare to today:
Let’s say you invest in a pretty decent index fund and get an average return of 7% over the entirety of your investment. With a fairly conservative rate if inflation being 3.5% and leaving it in that investment for 40 years, your money would increase like this:
(1.07/1.035)^40 = 3.78
So if you put in $10,000 now it would be as if you had $37,800 when it came time to pull the money out for retirement. The actual number will be higher, but the value of that money as compared to today would be $37,800.
Now if inflation was more like 3% over that time you’d have
$10,000 * (1.07/1.03)^40 = $45,900
Look at what a difference .5% can make over 40 years of investing!
Now I’ll show you why a savings account is not a long-term investment:
$10,000 * (1.01/1.035)^40 = $3760
$10,000 * (1.01/1.03)^40 = $4564
Banks are where you put money for things you need in the “near-term”, I’m thinking that means within 2-3 years.
For anything beyond 3 years, but not much further, you probably want a CD. Today the rates blow, but they usually beat inflation by a little bit. Actually they still beat inflation now, since the average over 2009 was -0.34% and most returns I’ve seen hover around 1-2%. If inflation stays on for the length of the CD as deflation, then you’d be in good shape with a CD. However, you might as well leave your money in a high-yield savings account for the time being as the return compared to a CD is pretty similar.
When you want to buy something within a few days the place you keep it is your mattress. I know no one puts their money in their mattress as a long-term investment, but just to illustrate how terrible it is for you to leave your money sitting in your house for 40 years:
$10,000 * (1.00/1.035)^40 = $2526
$10,000 * (1.00/1.03)^40 = $3066
Your $10,000 effectively becomes $3066! That means that the money you could use to buy a 600cc race replica motorcycle today would turn into money that might be able to buy you a 250cc training motorcycle in the future. You could buy a plush, robust leather couch today, or you could do nothing and wait 40 years to buy a half-way decent futon. It’s your choice, but a mattress is not an investment account. It’s a sure way to lose money. Well you’re not really losing money, you’re losing the value/worth of money which is way more important that than the number
If you ever want to see what the current inflation is I got 2009′s data from Inflationdata.com
Investing $10,000 today won’t make you a millionaire in 40 years, but it will make you 4 to 4.5 times richer than you were. The longer you wait, the older you’ll need to be when you retire. The stock market may have seemed like a dangerous place to put your money in 2009 as we’re undergoing a recession, but considering the dollar deflated over the same time period, any return was fantastic! Inflation puts a damper on the big numbers you’ll see for investing early, but you still get more worth out of your money the longer it has to collect compounding interest.
I guess I should end this article now, but I will say there are places to put your money for every time frame and my next money article will cover those different storage places.