How investing can help you fight inflation.
You’re finally making decent money, but with year-over-year inflation rates reaching heights unseen since 1990, you may be wondering how you can get ahead. Investing your extra income as early as possible is one way to protect yourself and your nest egg against rising prices over an extended period of time. Compounding interest (stop me if you’ve heard this one before) is one of the most important reasons behind this. A common rule of thumb is the “Rule of 72” which provides an approximation of the number of years it will take for your investment to double. This is simply found by taking 72 and dividing by your given interest rate.
A common misconception is that you need a significant amount of money to start investing.
A little bit can go a long way, so let’s review a timely example. As we close the door on this year’s Tax Day, the IRS is reporting an average tax refund of $3,263 for the 2021 tax year, up $448 from the average refund amount in 2020. If you chose to invest that $3,263 today, how would that grow over time?
You can use the Rule of 72 to see when that $3,263 would approximately double or you can use a simple time value of money calculation to project your account balance at different points in the future. For example, if you can earn 5% annually on your $3,263 invested today, it would be $4,165 in 5 years, $8,658 in 20 years, and $14,102 in 30 years. Now let’s say that you get a $3,263 refund every year and invested it while earning 5% annual growth. You would have $18,030 in 5 years, $107,894 in 20 years, and $216,790 in 30 years!
Inflation is nothing new; as many generations before us have experienced similar and much worse bouts of rising prices.
So the next time you find you have a little bit of extra money in your pocket, whether it’s a small raise, a tax refund, or even cancelling that monthly subscription you’ve long forgotten about – consider having that money invested. Though not guaranteed to appreciate, you allow your investment the opportunity to benefit from any positive compounding interest.
Past performance is not a guarantee of future results. The information discussed is for educational purposes only, and market returns are not guaranteed.