Have you ever thought of this question in your head? “Why should I invest?”
You came to the right place, this blog is all about personal finance and financial freedom. Investing is one way for you to gain financial freedom.
In the previous blog posts, I have already mentioned where to save money and the basics of investing. If you are still wondering why should you invest – let me make it clear. The money that is sitting idle in your account is going to lose its value in the coming years and decades.
This is because inflation exists. Meaning, everything you are using will get costly including products and services. This phenomenon is inflation.
I have listed a few scenarios on what happens to your money if it sits idle in a locker, left in a savings account or if you had put it in the stock market.
| Invested in | Amount | The average rate of Return (Based on Historical Data) | The projected Dollar value in 2040 |
|---|---|---|---|
| Nothing, Sitting idle | $10000.00 | 2.5 (Inflation) | $6181.00 |
| Invested in Stock market | $10000.00 | 7.5%(After inflation) | $42478.51 |
| Saved in Bank | $10000.00 | 1% (After inflation) | $12201.90 |
Protection Against Inflation
One of the main reasons to invest in assets that are inflation-proof and increase value over time is to prevent your capital from losing value. This way, you will be able to sell your assets and convert them to hard cash when required. If it is not invested, your purchasing power will get reduced. You may be able to resonate with the fact that you could have purchased more with a 10$ bill 10 years ago. The same can be only used to buy a fraction of what it used to do.
To prevent this from happening to you in the future, you need to ensure that you invest the money you don’t need in the short term.
We all know that how hard it is to earn money, at least for the majority of the world population. Thus, it is important to know how to preserve it too.
Passive Income
Another benefit of investing is that you will be able to get some passive income from the dividends paid by the stocks or funds you invest in. While not all stocks distribute the profit as dividends, some of the matured companies do.
This may not be a huge some, but it can be significant based on the amount invested. For example, if you have $10000 invested and the dividend yield is 5%, you will receive 500$ a year.
If the capital invested is say a million-dollar, this can provide you with 50000$ a year. This may be enough for you to sustain your lifestyle.
If you do not need the cash flow from dividends, you can always reinvest and let it compound. If you need cash flow, withdraw it and spend as you wish.
Wealth Generation
If you allocate a reasonable amount of your income and invest this amount, this can help you get wealthy. If you look at the history of successful investors, you will be able to find this pattern. they have re-invested any return from the investment and let it compound over time. This is how your money will be working harder for you.
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Compound Interest
Compound interest is when the interest earned earns more interest on it. This way your money will be multiplying over time. Famous scientist Albert Einstein once said, “Compound interest is the eighth wonder of the world”. Whoever understands will earn it and who doesn’t, pay it.
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Taking Advantage Of Time
When you are young, you have a long time for your money to compound. Thus, it is important to get started when you are young. A single $10,000 investment at age 20 would grow to over $70,000 by the time the investor was 60 years old (based on a 5% interest rate). That same $10,000 investment made at age 30 would yield about $43,000 by age 60, and made at age 40 would yield only $26,000. The longer money is put to work, the more wealth it can generate.
This way, you will be able to take advantage of the time.
Saving On Tax
Depending on where you live, you may also have investment options that help to reduce your tax. Usually, the governments will have some exceptions to help individuals to return less tax.
This may not apply to all asset classes and jurisdictions, please check on which instruments provide the tax benefit.
Achieve Financial Independence
Investing early can be a path to early financial freedom. The earlier you start saving and investing, you can become financially free earlier. If you are not sure about the importance of being financially independent, read this previous blog post of mine.
Retire Early
Retiring early is up to you and your choice, if you like what you do and enjoy, you do not need to retire. Once you achieve financial independence, it gives you an option to retire early. At this point, you may decide on what you want to do with your time.
Conclusion
I sincerely hope that the 6 reasons stated above will help to answer the question on “Why should you invest”, if you are aware of more, feel free to share it in the comments. This way, you can help to educate me and others who are on this journey.