Why should I start investing?

Harness the power of investing

The goal of investing is to grow your money over time. Although investing has inherent risk, it also has the potential for greater returns than if you simply left your money in a bank account.

The saver: Diego

Diego put away $3,000 per year into a bank account. He invested using 3-month Treasury bills. While the interest rate was relatively low, his funds were safe and easily accessible. At the end of 20 years, his funds grew to $66,131.

The investor: Alexis

Alexis also set aside $3,000 per year, but she invested her funds into a moderate portfolio over 20 years. At the end of 20 years, her funds grew to $150,117.

Area graph. Portfolio values increase over 20 years from $0 to $66,131 for Diego and $0 to $150,117 for Alexis.

Source: Schwab Center for Financial Research. The moderate model portfolio (allocated 35% large-cap stocks, 10% small-cap stocks, 15% international stocks, 35% fixed income, and 5% cash investments) may not be suitable for all investors. The indexes used are: S&P 500 Index (large cap stocks), Russell 2000 Index (small cap stocks), MSCI EAFE Index (international stocks), Bloomberg US Aggregate Bond Index (fixed income), FTSE Treasury Bill 3-Month Index (cash investments). The index representing cash is FTSE Treasury Bill 3-Month Index. Returns assume reinvestment of dividends and interest. Fees and expenses would lower returns. This chart represents a hypothetical investment and is for illustrative purposes only. The actual rate of return will fluctuate with market conditions. Past performance is no guarantee of future results. Both investors make a $3000 contribution at the beginning of each year.

The power of compounding

Investing isn't just about how much money you have to invest. It's also about how much time you have to invest it. That's because of the power of compound growth.

Compound interest makes your money grow faster because interest is calculated on the accumulated interest over time as well as on your original principal. Compounding can create a snowball effect, as the original investments plus the income earned from those investments grow together.

If Alexis keeps investing $3,000 per year for 40 years with an average annual return of 5%, watch how her balance skyrockets over time. At the end of 40 years, her portfolio is worth $380,519, even though the actual principal she invested was only $120,000. Every year, her 5% return was based on a newer, larger balance comprising her initial investment, subsequent yearly investments, and the money she earned from interest. That's the power of "compound returns."

Area graph. A person invests $120,000 over 40 years with compounding returns of $260,519, for an ending portfolio value of $380,519.

Source: Schwab Center for Financial Research. The chart above is for illustrative purposes only. Earnings assume a 5% annual rate of return including the reinvestment of dividends and capital appreciation and do not reflect the effect of fees or taxes, which would reduce the overall amount.

Don't forget about inflation

There's another big factor to consider when comparing savings to investing. Recent savings rates haven't kept up with the rate of inflation, meaning the actual purchasing power of money in a savings account can shrink over time.

This chart illustrates the impact of inflation on the purchasing power of a fixed annual $50,000 income. Here we see that with a hypothetical 3% inflation rate, the fixed annual $50,000 income can purchase only $37,200 worth of goods or services at the end of 10 years (a 26% loss of purchasing power) and only $27,684 worth of goods or services at the end of 20 years (a 45% loss of purchasing power).

Bar chart. Over 20 years with 3% inflation, purchasing power decreases 45% from $50,000 to $27,684.

Source: Schwab Center for Financial Research. The "nominal" amount is the stated value. The "real" amount is the value adjusted for the effects of inflation. Inflation is represented by the change in the Consumer Price Index for AII Urban Consumers (CPI-U). From 1926 to 2021, inflation averaged 2.89%. But during some periods in the past, the average was much higher: It averaged 6.2% from 1970–1989. Past experience is no indication of future events.

How to invest: Five-step guide to help set yourself up for success

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How to invest: Five-step guide to help set yourself up for success

This actionable guide will help you create an investment strategy that aligns with your goals.