If you’re like most women I know, you take real pride in making your own money. And you should — because you’ve literally earned it.
But earning and saving aren’t the only things you should be doing—investing can make a heck of a lot of sense for you, too. And I’m not just talking about your 401(k) (kudos to you if you’re contributing) or your IRA (another thumbs up) or even your Roth. I mean investing in you —building wealth starting today so Future You can have the retirement of your daydreams.
Sure, investing can be a little scary (most of us hear about the market fluctuations), but it’s important to remember this is a long game — we’re talking 35-40 years! And if you don’t invest, and just keep your cash under the mattress (or, you know, in a savings account), in the long run, you’ll be losing money. That’s a fact. In order to build real wealth, you will need to invest your money over time. The good news: investing is not that scary, you don’t need to be rich to start, and you certainly do not need to know a whole lot about the stock market to make good investments — especially when there are robo-advisors with algorithms tailored specifically to women’s incomes and life cycles — that can help.
So what is investing, how do you do it, and, most importantly, why does it even matter?
Keep reading to get the full rundown on why you need to start investing, including what you can do to get started today.
Look at the Numbers
Did you know that historically your money doubles in the market every eight to 10 years? That may not sound like a good deal but stick with us for a second — let’s look at the numbers. If you wanted to save $1,000,000 by the time you retired (assuming retirement is 35 years away) you’d need to save $2,380 each month. But if you wanted to invest your way to a million dollars, you’d only need to save $491 a month. It’s not magic or bogus, it’s compounding. Einstein called compounding the eighth wonder of the world, and we couldn’t agree more.
Start Investing with Small Amounts of Money
Investing your money is an important way of helping you accomplish your specific, real-life financial goals. Whether you are looking to buy your first home, go back to school, start a family, or just grow your overall wealth, investing is arguably the best way to reach those goals.
When I started working my first part-time job, a good uncle encouraged me to open an investment account with a robo-advisor. I took his advice and set up an automatic contribution of just $30 per month. That’s $1 per day. If you’re reading this you can find a way to come up with $1 per day. No matter how small you start, the most important thing is to get started. You can always increase the amount you save over time. I’m saving way more than $30 per month now. But, the idea is to start.
The sooner you get started the easier it will be to get on track for your financial goals, whatever they may be. Even if you have to start small with just $5, get started. You may not be rich yet, but you will never be if you don’t get stat investing.
Put Yourself on Autopilot
As I mentioned earlier, automation is the easiest way to save. When you choose how much to put toward your 401(k) — whether it’s a dollar amount or a percentage of your pay — the money goes into your account before it’s taxed and before you even get a chance to think about spending it. You can replicate that process for an IRA and other investment accounts by setting up automatic monthly payments through your bank. Doing this removes the temptation of spending instead of saving.
Get Your 401k Match at Bare Minimum
The first place you should save for retirement is your employer-sponsored 401(k) plan. This money comes directly out of your paycheck before it hits your bank account, so you may hardly notice. You will seriously end up wanting to kick yourself if you get your full company matches each and every year. An employer match is like a raise without doing any extra work and can range from two percent to sometimes as high as 15% of your annual salary depending on your employer. A huge advantage here is the money comes to you pre-tax and, depending on your age and how you invest, could turn into a substantial amount of money later in life. It’s basically free money to you. You’d have to be crazy not to do everything in your power to get every single cent of it each and every year.
If you’re already investing in your company 401(k), good for you. An important question to ask yourself now is “How am I investing?” If you’re looking for help, our friends over at Ellevest will give you (complimentary) recommendations on how to allocate your “outside” retirement accounts, so you can get a more comprehensive investment approach and the best chance for success.
Have one or multips 401(k)’s or 403(b)’s from previous jobs? Roll them over into one place: your Ellevest retirement account.
Open an IRA
The next step for saving for retirement is an Individual Retirement Account — aka, an IRA. Anyone with earned income can open an IRA. That’s great news, especially if you’re self-employed, or work at a place without a 401(k) plan. Once you open an IRA, it stays in the same place, even when you switch jobs; it’s not housed with your employer.
Here are your IRA options: There’s the traditional IRA, a Roth IRA (which comes with income limits), and — if you’re a literal boss and are self-employed — you may want to open a Simplified Employee Pension IRA (SEP-IRA).
Traditional IRA vs. Roth IRA vs. SEP-IRA – What’s the Difference?
The basic rule with IRAs is you’re going to pay the US government taxes at some point. The question here is when you pay them. With a traditional IRA, the government postpones your taxes. You contribute pre-tax earnings, reduce your tax liability for the year, and watch that money grow on a tax-deferred basis year over year. You don’t pay the piper until you withdraw your money in retirement.
With a Roth IRA, you pay taxes on the amount you contribute first. You don’t reduce your current tax liability, but once you pay those taxes, you don’t have to pay them again. What does that mean? It means you’re not paying taxes on the growth of your investments. When you make withdrawals, every last penny is yours to keep. In 2018, your total contributions to all of your traditional and Roth IRAs cannot be more than $5,500.
While anyone can contribute to a Traditional IRA, eligibility for a Roth IRA is based on your income level. You can see which one’s right for you at Ellevest, or at another financial services provider. Whether you go with a Traditional or Roth account (or both), the bottom line is an IRA lets you add thousands of dollars a year to your retirement savings.
Then there’s the (SEP-IRA) for bosses who are self-employed or small business owners. A SEP-IRA is like a traditional IRA: Your contributions are tax-deductible and your earnings grow tax-deferred, so you only pay taxes on the money when you withdraw it. But you can contribute way more money to a SEP IRA. The maximum for 2018 is 25% of your earnings, up to $55,000.
Let Compounding Interest Work its Magic
I can’t say this enough. Start investing now. The earlier you start the better. So what is compound interest? You’ve probably heard this buzzword in more place than one. In the simplest meaning of the phrase, it means “interest on the interest” and is the reason many investors are so successful.
Here’s an example of compound interest at work: saving just $100 per month, from 22 to 67, equates to approximately $1,048,000 provided you earn 10% growth per year. Waiting until you’re 32 years old to get started will cause that number to drop to $379,000. As you can see, waiting 10 years will result in a loss of about 64% of your retirement nest egg, all else being equal. (Ok, maybe you shouldn’t expect to earn 10% a year. The point still holds. At a 7% annual return, you’ll have about $379,000 if you get started at 22, but just around $180,00 if you wait until 32.)
Invest Your Money with Ellevest
Sallie Krawcheck founded Ellevest with the specific goal of closing the aforementioned investing gender gap. The company aims to serve women’s needs better than any other existing system by using an algorithm tailored specifically to women’s incomes and life cycles. (Yes, no one else has thought to do this before,)
No matter what you’re investing for, Ellevest can help you get started — and have you investing in as little as 15 minutes post with no minimum deposit.
The platform is well-designed, easy-to-use, and speaks to our unique financial needs — whether that be planning for retirement, that Aussie vacation, or starting a family. The best part? The advisors at Ellevest are incredibly knowledgeable and will help you every step of the way. Another big bonus? Ellevest has no minimum so you can start with as little as $5 today.
This is a lot of information to take in, but take it one step at a time. Trust your gut, do your research. And choose what’s right for you. You’ve got this.