There's a common misconception that only people with a lot of money can invest in the stock market or accumulate large savings accounts. As many as 44% of Gen Z (those born between 1996 and 2012) surveyed in late 2022 who didn't invest, said they couldn't due to limited funds†.
In reality though, investing a small amount into a retirement plan or mutual fund or depositing a little in a savings account on a regular basis may be a good way for you to start, and over time financially rewarding. Talk to an advisor to learn more.
Understanding Savings
We'll cover the potential returns a savings account may provide, but first, one of the most compelling reasons to maintain a savings account is security. The Federal Deposit Insurance Corporation (FDIC) protects consumers against the loss of their insured deposits if an FDIC-insured bank or savings association fails–up to $250,000 per depositor, per FDIC-insured bank, per ownership category.
It's important to note that not all accounts are FDIC-insured, so talk to your banker for more information.
Savings Account Interest 101
Interest rates are primarily impacted by Federal Reserve policy, which steadily increased Federal Funds Rates since March 2022 (when it was at 0%) to help counter rising inflation. Savings account rates generally follow the Federal Reserve rates, and even with a modest interest rate, savings accounts can safely help grow account balances over time.
Compound Interest and Your Savings
Albert Einstein is said to have called compound interest "the eighth wonder of the world." True or not, it's a simple concept essentially of earning interest on interest. In a nutshell, you earn interest on funds that include already-accrued interest. Your funds increase on their own when you're watching a movie and even when you're sleeping!
Using a compound interest calculator, the bullets below show how compound interest can help grow your money. Assuming a savings account interest rate of 3%, regular monthly deposits over the next five years can achieve the following:‡
- Initial and monthly deposit of $10 will grow to $658
- Initial and monthly deposit of $50 will grow to $3,290
- Initial and monthly deposit of $75 will grow to $4,935
- Initial and monthly deposit of $100 will grow to $6,580
Example provided for illustrative purposes. Rates fluctuate and may be higher or lower than the assumed rate used.
Investments made simple(r)
Investing doesn't have to be difficult, especially with the help of an advisor. Basically you buy a security, such as a stock or bond that's traded on a stock market, the value of which may increase–or decrease–over time. But as an example, since the modern inception of the Standard & Poor's 500 Index (aka S&P 500) in 1957, the average annual return is more than 10%.§ (The S&P consists of 500 leading publicly traded companies in the U.S., and is considered a good gauge of the stock market overall.)
We can't overstate, though, that investments in stocks, bonds and other securities come with risk, including loss of principal, and that past performance isn't a guarantee of future returns. Investors cannot invest in an index.
For some, 1957 may seem like forever ago, but you don't have to go that far back to see positive results. As an example, if you invested only $100 in the S&P 500 in 2010, it's estimated that it would have grown to $415 by the end of 2022. All you had to do was keep your money invested and your $100 would be more than $400¶.
Dollar-Cost Averaging
The benefits of continual investing, even minor sums, can lead to impressive earnings. Dollar-cost averaging (DCA) may sound complicated, but it simply involves investing the same amount of money in the same security at regular intervals over a certain period of time regardless of price. By investing on a regular basis, such as monthly, you can avoid trying to time the market, which rarely works out anyway. Hence the expression 'Time in the market beats timing the market'.
The important lesson with DCA is the powerful impact regular, even small, investments can have over time. Also, when investing month after month (and hopefully year after year), during market downturns your regular investment may be able to buy more shares of your securities because of fluctuating prices versus buying in with a one-time investment.
Ultimately, whether or not you should use DCA would depend on how risk-tolerant you are and how much money you have available to invest. DCA does not ensure a profit or protect against loss in declining markets. You should consider your financial ability to continue to invest, even when prices are low or in continually rising markets, because there's a potential to end up with fewer shares.
Getting Started Now
The methods of getting more out of your money outlined above rely on different tactics, but what's important is to start now. Education and a common understanding of investing and investment-related terms are almost as important as actually doing the investing. It's never too early to begin planning for the future. Whether saving or investing $5 a month or $500, nothing beats just doing it! Find your local Huntington branch to start now.
