Worth it?


Even if you’ve never been taught how to invest your money, it can be very simple and beneficial to do early on in life. Young people stand to make the MOST out of investing because the longer you leave your money in, the more time it has to grow, which you can calculate with our free Visual Calculator App. This is thanks to a basic math principle called compound interest.

Compound Interest Makes Millionaires

If you take a penny and double it every day for a month, how much would you end up with?
A hundred dollars? A thousand?
Try $10,737,418.24.

This is how one penny becomes over 10 million dollars in just 31 days:

compound interest double penny 1-01-01 compound interest double penny 2-01-01 compound interest double penny 3-01 compound interest double penny 4-01 compound interest double penny 5-01-01 compound interest double penny 6-01-01-01 compound interest double penny 7-01 compound interest double penny 8-01 compound interest double penny 9-01 compound interest double penny 10-01 compound interest double penny 11-01 compound interest double penny 12-01 compound interest double penny 13-01 compound interest double penny 14-01 compound interest double penny 15-01 compound interest double penny 16-01

The growth of the original penny is sped up because not only was your original penny collecting interest, but all the pennies you earned as interest also began to collect interest. The growth grew upon itself, or “compounded.” The first week you were still in the pennies, but towards the end of the month that change snowballed.

The more time your investment has to grow, the faster you can accelerate the potential growth of your original investment.
See how much your savings could grow with compound interest with our free iOS app for new investors!

Which Investment Account?

There are many types of investment accounts, including regular brokerage accounts, retirement or “IRA” accounts, and 401ks. If you are able to leave your money in longterm and maximize the advantages of compound interest, consider opening an IRA account. An IRA account is where you can purchase mutual funds and hold them as they grow in worth.

Here’s an example:
A 20-yr-old makes a one-time $5,000 contribution to a Roth IRA and earns an average 8% interest annually.
Even if they never touch that $5,000 investment, it would grow to $120,000 by the time they retire at 65.
But if they wait until they’re 40 to make that single $5,000 investment, it would only grow to $24,000.
That’s because the original investment, which earns 8% each year, doesn’t have as much time to “compound.”

ROTH IRA interest-01-01-01

There are a few rules with IRA accounts, such as a maximum annual contribution and a penalty for cashing out what you put in, although you are free to cash your gains out at any time. There are two types of IRAs:

A Roth IRA is a retirement investment account that allows your money to grow tax-free. You fund a Roth with after-tax dollars, meaning you’ve already paid taxes on the money you put into it. Instead of an up-front tax break, your money grows and grows tax free, and when you withdraw at retirement, you don’t have to pay tax.

A Traditional IRA is the opposite, in that you can deduct your deposits on your taxes, which can be a nice tax break. However once you take the money out at retirement, you’ll have to pay taxes on the final value of your investment.

IRAs are basically open to anyone who has income, but some employees at larger companies have the option of investing in 401(k)s. If you have access to a 401(k) and your company offers a matching contribution, that’s usually the best place to start. If your employer matches your 401(k) contributions dollar-for-dollar, that’s free money. Who doesn’t want that?

By investing early on in life, your money stands to grow significantly over time. That’s why your age is your edge.

How Inflation Affects Your Savings

A savings account may seem safe, but consider how your money is impacted by inflation.
As inflation rises, every dollar buys a smaller percentage of a good. For example, if the inflation rate is 3%, then a $2 burger will cost $2.06 next year:

cost of a burger inflation-2-01


This is how the value of a $100 bill would change over time, with an annual 3% inflation rate:

value of 100 bill inflation-2-01

In 2013 the average interest rate for a savings account was less than .1%, and the average inflation rate was just under 2%. Like most other countries, our central banks try to keep the inflation rate around 2-3% for a stable economy. That means your money is actually depreciating in value every year it sits in a savings account.

On the other hand, the historical annualized returns of the stock market average between 6-10% over the past 100 years. Those gains are not immune to inflation, but a high market return minimizes the hit. Investment accounts are higher risk than savings account, which is why many financial advisors recommend diversification and mutual funds to mitigate risk.

Starting with Mutual Funds

A mutual fund is a collection of stock in different companies, which is generally considered safer and more diversified than investing in just one company. With a mutual fund, you invest money in an array of companies and as they make money, so do you.

mutual fund simple infographic_2-01

Index funds are mutual funds that track the performance of market benchmarks, such as the S&P 500. These are “passive” funds because there is little management needed, and often have significantly lower fees. It’s like investing in the overall state of the market, which is very diversified. Also, most actively managed mutual funds actually underperform the S&P index.

When choosing a mutual fund, ETF or index fund, read our guide on things to look out for, including fees. A good rule of thumb is to get a percentage as close to zero as possible, so that management costs don’t eat away at your growth.

VFINX and SWTSX are examples of 2 different mutual funds (not affiliated with Outer Worth). You’ll quickly notice that stocks and mutual funds always have short but confusing acronyms, unless they happen to be a four letter company like Ebay. What may not be immediately obvious are their expenses (VFINX is .17%, SWTSX is .09%) and investment minimums (VFINX is $3k, SWTSX is $100). But these components can be discovered with a quick search.

Don’t forget to take our millionaire quiz to gauge how early you should start investing in your mutual fund!

Socially-Responsible Investing

There is a growing number of socially-responsible mutual funds out there, which is a great way to grow your money while it shapes what the world invests in—whether it’s showing support for clean energy, smaller businesses or ethical practices.

eco-friendly mutual funds

TRDFX and GCEQX (not affiliated with Outer Worth) are just a couple of known mutual funds with sustainable holdings. When searching for mutual funds and stocks, you should be able to use your broker’s filtering tools to sort out the types of companies you wouldn’t want to support.

As an investor, you are empowered to pick companies you’d want to see thrive. If you want to invest in only sustainable or socially-responsible companies, there are mutual funds for that. And as the demand for those investments grows, that could influence the larger financial industry in a positive way. Not only could there be more incentives for companies to act responsibly, but you are investing in a future you believe in, plus making money for yourself!

What Is The Stock Market?

The stock market is a place where shares of stock are bought and sold. A share of stock is literally a share in the ownership of a company. When you buy a share of stock, you’re entitled to a small fraction of the assets and earnings of that company.

Stocks in publicly traded companies are bought and sold at stock markets like the New York Stock Exchange. For a quick picture at how the stock market is doing, many people look to the Dow Jones Industrial Average, the S&P 500 and the NASDAQ Index. These are broad market averages designed to give you a general idea of how the stock market is doing. If the economy is doing well, then the prices of stocks tend to rise all together.

This is a quick snapshot of the last 100 years of the stock market, using the Dow Jones Industrial Average as an index:

100 years of stock market dow jones-2-01

When you look at the market on any given day, it can be up or down—but this is just an isolated snapshot. When you zoom out to the broader view, there is an overall upward trajectory that the stock market has been making for 100 years.