Recently, AJ came across a TikTok video where a woman was explaining this in depth. In essence, investing is a 2-step process. Without the second step, you might as well stash the money under the good ole sleep number mattress. Either way, make sure you’re not just saving, but INVESTING!
Accounts you can invest in
There are a lot of different accounts that are open to investments, but the majority of them are:
- IRA/Roth IRA
- 401(k), 403(b), 457(b)
- Brokerage Account
- HSAs, 529s, etc.
This list isn’t all inclusive, but you get the point. Let’s take the Roth IRA for example. This is one of our favorite accounts here at Wealthy Idiots, and for good reason. But, make sure you aren’t just funding it blindly and forgetting to invest! Once the money is in the account, you need to buy a stock, bond, mutual fund, ETF, etc. in order to generate wealth.
As you may know, some of our favorite ETFs are index funds such as Vanguard’s Total Stock Market index fund (VTI) and S&P500 index fund (VOO). In order to purchase one of these you would access your Roth IRA account at whichever broker you use (we prefer Fidelity, Vanguard, Schwab, or E*Trade) and then place a buy order for whichever security you’d like to purchase. If you want to buy VTI this could easily be found by searching VTI within the brokerage site. You could also search a single stock like Amazon, or a mutual fund, as long as your broker offers these or allows the purchase of outside mutual fund products.
Once you complete the order, you’re officially an “investor.” Congrats!
Why investing matters
Well, it matters for a couple of reasons. First, the “sweep account” or the account your money lands in at a normal brokerage, carries very little interest and won’t make you wealthy anytime soon. This is where you find your normal .3% savings accounts. There are some exceptions, but usually you need to move the money into those exceptions.
The second reason this matters is because regular investing in stocks, bonds, mutual funds, etc. allows you to dollar cost average, or DCA as it’s often referred. By doing this, you’re ensuring that you are always getting a fair market price by buying over a really long timeframe. Pretty simple. This is also how people get in the habit of continuously investing without worrying about day-to-day market swings.
The power of investing in the market
Let’s look at two examples to try and firm this up.
Example 1: Bob decides to open a Roth IRA (again, our favorite account if you can’t tell). He opened the account in 2016 and put approximately $40k in the account since that time. Since he forgot to invest the money once it landed in the account, he only earned .3% interest per year since 2013. The account is essentially worth the same $40k he started with. But wait, since we have this nasty little thing called inflation, Bob actually lost some purchasing power by leaving this money uninvested. Ouch!
Example 2: Mary opened a Roth IRA at the same time as Bob, however as a child, Mary’s parents were always telling her to buy VOO and it was something she never forgot. Each year, she bought around $5k worth of VOO. In 2023, Mary now has around $60,873. Pretty solid growth considering everyone is fleeing from stocks right now!
All Mary did was take one extra step to invest her money. Because of this, she has approximately $20,873 more than Bob. If Bob started investing today and they both make 10% average returns over the next 30 years without adding another penny to the accounts, Mary will end up with $1.06MM while Bob has around $700k. Yes, Mary has $300k more than Bob by just taking one extra step with her money. INVEST TODAY!
Compounding for the win
We talk about this a lot, but it really can’t be said enough. Compound interest is amazing, and you really need to understand it in order to see your full investing potential. Check out our compound interest calculator and see what compounding can do for you. You can also check out our Tweet below, which includes an awesome graphic from NerdWallet!
