You Know What’s Scarier than Investing in the Stock Market?
…not investing in the stock market.
This post is a follow-up to my earlier post, “How I Wish Someone Explained the Stock Market to Me”. If you haven’t read that one yet, I encourage you to start there.
In one of my favorite childhood movies, the dad keeps his money in a box under his bed because he’s scared someone will steal it. Growing up, I always thought this was the safest thing: keep your money where it is safe and you can see it. Up until I was 25, I kept all of my money in a metaphorical box under my bed. Not literally, but all of my money sat “in cash” in checking and savings accounts at TD Bank.
When your money is in a savings or checking account, it is considered to be “in cash” because it is “liquid” or can become liquid (money in your literal hands) very quickly. The amount basically stays the same over time and you can more or less access it whenever you want.
Keeping my money in accounts like these felt like the safest option for me. “I just want to keep saving my money” I thought to myself. Financially responsible people just save their money, right?
Actually, not necessarily.
Getting Started
In December 2017, my partner prompted me with the idea of paying a robo-advisor to expose me to the stock market. I was hesitant because I had all kinds of misconceptions about the stock market (it’s scary, confusing, risky, only for men, only for people who “get” finance, only for wealthy people, only for greedy people, etc.), but I deposited a small amount in just so I could start to learn how stock works at a very basic level.
At first I rarely checked it, but over time, I started looking at it somewhat regularly. I noticed my money growing over time (not everyday, but over longer periods it was generally moving upwards) and started to get curious. I compared it with my savings account where my money was basically staying the same.
What is the difference between investing in the stock market and just keeping your money in a checking or savings account? Aren’t both saving you money?
When you have your money in regular checking and savings accounts, it is basically 100% safe — there is no risk that your money will decrease or go away (aside from a major financial crisis where banks are failing, but that’s unlikely and not the point of this post). However, there is also no chance that your money will increase in any significant way. I learned that my TD savings account was only making .05% interest per year (this is pretty normal — on average savings accounts make .06% interest per year and the best ones can make around 2% — I now use Ally Bank because it has a high interest rate for savings accounts). Basically, if I had $1000 in my TD savings account, over a year, I would only make 50 cents in interest.
The stock market, however, has a much higher interest rate OVER TIME. Yes, the stock market can be volatile. Yes it can fluctuate. It can even crash. But when we look at trends throughout history, the stock market tends to trend upwards over time.
If you have money that you won’t need to access for a long time (like 10 years long), then the stock market is actually a much better way to help your money grow than having it sit in a savings account with a low interest rate. I’m not talking about making fast cash. Your money will make money in the stock market if you are willing (and financially prepared) to be patient. You basically have to be ready not to see your money for a very long time.
Why does my money grow in the stock market?
The reason your money is more likely to grow quicker in the stock market than in a savings account (low interest) or checking account (no interest) is because of compounding. I briefly mentioned this in my last post, but compounding essentially means that your money makes money and then that money makes money. The growth is exponential rather than linear.
The stock market TENDS to return an average of about 7% over time (keeping inflation in mind). I keep emphasizing this idea — OVER TIME — because the stock market can have volatile years where it will drop a ton and you will get very little returns and might even lose money. But these drops tend to correct themselves (they are literally called “corrections”) and go back up over the long term. This is why you have to be willing to stick it out and leave your money in the stock market for a long time.
So let’s go back to the example of having $1000. If you let that money sit in your savings account with a .05% rate of return (interest rate), after ten years, you will have $1,005. In ten years, you will have earned five dollars. That’s better than earning no dollars, but it’s still pretty crappy compared to what could have happened if you put your money in the market instead.
If you put that same $1000 into the market (or in my case let a robo-advisor put that money into the market for me) and the market returns 7% a year (140x the return of my old savings account at TD) at the end of ten years, you would have $1,968. Your money would have almost doubled because you chose to let it sit in the stock market instead of letting it sit in a savings account.
In ten years, would you rather have made 50 cents or $968? That’s what I thought. And that’s the magic of compound interest! When you look at it this way, not investing in the stock market is actually scarier than investing in it.
*Disclaimer* I am NOT a financial advisor, I have no formal training in this space, and I am not authorized to give advice on how to manage your finances. I am literally a woman who realized she didn’t have her financial sh*t together, who felt systemically kept in the dark about money, and who is trying to learn as best she can how to get out of the dark.
TLDR;
The stock market can feel scary, but if you have money that you’re financially able to set aside for a long time (like 10 years), it’s riskier NOT to put it in the stock market.
On average, savings accounts give you interest rates of .06%. Some of the best ones give higher rates closer to 2%. If you’re not ready to put money in the stock market yet, consider finding a savings account with the highest possible interest rate.
The stock market has an average annual return of 7%.
The reason your money can grow so much in the stock market is because of compounding. You make money and then your money makes money.
