However, just saving money alone isn’t going to be enough to get us there. The next step is what we do with our savings, which involves making sure that our money is working for us. This means we need to invest money!
I’m sure we all know people that are quite risk-averse, and don’t feel comfortable with investing money. These people simply want to hide money under the mattress, or put most money in a low-yield savings account. Or, perhaps throw money in CDs or some other conservative investment. But where is the upside there?
Sure, we do need to think about the notion that risk and reward often go together. But over the long-term, if we hold on long enough, it’s been the case than people have done quite well in the markets versus staying on the sidelines.
Let’s take a couple of examples, to answer the question of “why does rate of return matter?”
Example 1: 2 % rate of return
Let’s say someone invested $10,000 and held for 30 years. A true long-term investor! Let’s also assume that this person earned 2% per year, compounded annually. After 30 years, the $10,000 will end up being over $18,000.
Example 2: 8% rate of return.
Again, let’s say that person invested $10,000 and held for a 30 year time frame. However, in this case the rate of return is 8%, compounded annually. This $10,000 will become over $100,000!
That’s a pretty big difference! Now, it doesn’t account for inflation and taxes. However, the magnitude of the difference between the two options in pretty clear. Just imagine if we looked at an example where money was invested every year, instead of the one-time investment noted above!
The Moral of the Story: Rate of return really matters! This is why it’s important to invest, and not be too afraid or stuck with inertia.
Readers, do you ever think about making sure you’re investing your savings properly, and getting the a good rate of return?