Here's exactly how much money you miss out on by letting extra cash sit in your checking account
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Avoiding risk by not investing in the stock market also means you're missing out on potential gain.
We compared the potential growth of $10,000, plus additional monthly contributions, in a traditional savings account, money-market account, a 5-year certificate of deposit (CD), and index funds.
The calculations show that money invested in the stock market has the greatest potential for growth.
Once you've established an emergency fund, paid down high-interest debt, and can comfortably cover your monthly expenses, it may be time to put your extra savings to work in the stock market.
Investing requires taking a risk, and it can seem scary at first sniff. But avoiding risk means you're also avoiding potential gain.
Once you've established an emergency fund, paid down high-interest debt, and can comfortably cover your monthly expenses, it may be time to put any extra savings to work in the stock market.
Consider the chart below, which compares how a $10,000 balance, with additional monthly contributions of $100, would fare over five years in various savings vehicles — a traditional savings account, money-market account, or 5-year certificate of deposit (CD) — and an index fund, a type of low-cost, broadly-diversified investment.
Most CDs have a fixed time frame and don't allow additional contributions between initial deposit and the maturity date, so additional contributions would be $0.
Yutong Yuan/Business Insider
While many online banks offer current rates on money-market accounts above 2%, we used national average rates from the Federal Deposit Insurance Corporation (FDIC) to calculate the most conservative estimate. The stock market's historical rate of return is 10%, or between 7% and 8% when adjusted for inflation.
Compounded annually, index funds yield the highest return, growing the initial account balance, plus additional contributions, to over $21,000 in five years.
There are more options for short-term savings
While the stock market clearly has the potential to provide the best return, money invested isn't easily accessible and there's a chance you will lose it in a downturn. Still, it's important to remember that true wealth-generating investments are long term, and any losses will typically correct themselves over time.
If you're looking for a place to store savings you'll need in the short term while still earning some interest, a money-market account or high-yield savings is a good option, or even a CD if you don't need the money until a future date.
A CD comes with a specific term length, from three months to five years, in which the money typically can't be accessed without paying a penalty. Generally, the longer the term length, the higher the interest rate.
You might already be invested in the stock market
If you're contributing to a retirement account like an IRA or 401(k), you may already be investing in the stock market. A tax-advantaged retirement account is one of the best ways to get started investing, according to Ryan Cole, a certified financial planner and private wealth advisor at Citrine Capital in San Francisco. When your earnings grow tax-free, you have the potential to earn even more.
Your retirement plan may give you the option to invest in index funds through an ETF or mutual fund. Index funds are often recommended by financial planners for first-time investors because they have low management fees and expose the investor to a broad selection of stocks.
You can also invest in index funds directly, through firms like Vanguard or Charles Schwab, or using robo-advisors like Betterment and Wealthfront. These are good tools for people who want to keep fees low, to start investing with small portfolios, and to be able to "set and forget" their investments.
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