Modern life has a lot of pressures coming your way, and none are more frustrating or mind-boggling than financial issues. These issues include things such as grappling with matters of money, saving, and investing.
No matter what stage you are in your career, life, or otherwise, you need to have a coherent grasp of financial planning and strategy.
But you might wonder why investing is important, and what are the benefits of investing? After all, there is some reason to be skeptical.
From a major financial crisis in 2008 to slower wage increases and rising costs of living, the amount of liquid cash you have on hand might be getting stretched more thinly than ever before.
Yet, no matter how much money you make, you need to set some aside for yourself as an investment. Investing is important because:
- you can use your money to make more money
- it is the cornerstone of all retirement planning
- it gives you the ability to save for long-term goals
- you can take advantage of tax savings
- you can grow your net worth more aggressively
- it allows you to save for an emergency
- you can fund a business or a major life change
Keep readings as we discuss these seven reasons in-depth on why investing is important and why you need to get started as soon as possible.
1. Your Money Makes Money
Probably the single largest benefit of investing your money is that you “put your money to work.”
As with any financial investment, there are risks involved – such as losing your entire investment. But there are also huge upside benefits as well. For one, the sky is the limit as far as your investment’s value.
The bottom is definitely $0 (assuming you are not shorting any stocks), but the top is infinity.
Given that you can make so much money on an investment, there tends to be a lot of risk. Many new investors focus on the risk portion of the equation because it is the easiest to understand.
However, few people realize that, theoretically and for a myriad of reasons, any stock can shoot up well beyond its rational value. While you should avoid speculative investments and bubble markets, any run of the mill stock could shoot up in value.
Common examples include stock that you purchase at $10 per share which eventually goes to $80 per share, and other more reasonable gains.
Did you know that the S&P 500, a collection of top stocks, has returned an average rate of 9.8% between 1928 and 2016? That means that, even if your stocks were the most average and mundane instruments available, your capital would have appreciated 9.8%, annually, for the entirety of the almost 90 year period.
Here is some context to understand how much money that could potentially have become over time.
Let’s consider you contribute $100 monthly to a starting balance of $100 ($1200 annually plus $100 starting balance). Your ending investment value would be $218,500 as opposed to your $108,000 in contributions.
You more than double your money simply by investing it in one of the most basic and sound financial instruments available on the market. The sky is the limit, and the math speaks for itself.
2. It Is The Cornerstone Of Sound Retirement Planning
The cornerstone of sound financial planning is a retirement that provides for your needs in addition to those you don’t expect. As illustrated above, there is no way to do this without investing in the stock market.
Even if you diligently invest for the full 90-year term listed above (a feat in itself), you would be losing out on a lot of the gains your investment could be making by instead placing it in a savings account bearing a lot less interest.
Although the difference between saving and investing was not discussed above, you should know that a rate of return of 1-2% in a savings account will never catch up with an investment posting 9.8% returns on average.
The safety of savings is negated in many ways by the advantage of appreciation seen in the stock market.
Also, the stock market is a better index of inflation (the rise in the cost of goods over time) than a savings account is.
But you might be asking, how exactly does that work?
Think of it this way. A company sells widgets for $1 now, and five years from now, that same widget costs at least as much. Then, the company’s revenue, if all else holds the same, will inevitably rise by the same or greater increase in material costs.
When reported to investors, the company will report steadily rising revenues as consumers spend more money on their products.
However, since your savings account simply holds money for you, it does not gain from investments. Furthermore, it is not being used to buy anything, but rather to insure something. You are ensuring it doesn’t lose value.
However, because you are not buying anything with your money in a savings account, it is not directly tied to the value of currency as used in a bartering market.
Therefore, to tackle the rising expenses of retirement and old age, a fund that is indexed for inflation is the only way a retiree will be able to maintain their lifestyle without serious cutbacks or even taking on a job.
3. Save For Long Term Goals
Retirement is a long term goal, but it’s also something that a lot of people cannot fathom.
For those people that struggle with the larger, grander scheme of things, it helps to break it down into steps.
Perhaps you would like to buy a house or a condo one day. The most effective way to save up and make your money worth as much as possible is to put some of it in an investment.
For the reasons listed above, you might have the stock market do a lot of the work for you.
After all, you are limited in how many hours in a single day that you can work. However, money in the market is working for you at all times.
Additionally, there is another aspect of stocks that are somewhat less exciting, and a little bit old school. These are called dividends.
Simply put, dividends is money that you get paid to hold a stock.
One way you can save for a house, for example, is to put some money into an investment called a real estate investment trust, or REIT. These stocks, such as New York Mortgage Trust, return high dividends on the value of their shares. NYMT pays 13% dividends annually.
That means that for every $100 you invest, you get paid $13 a year for simply holding the stock.
Make your dream pay for itself. Use dividends and growth stocks to achieve financial independence, homeownership, and other long term financial goals.
4. Take Advantage Of Tax Savings
Did you know that some laws encourage savings and even give you tax kickbacks for doing so?
Often associated with retirement investing, you can get a lot of tax advantages for simply putting money away for a rainy date.
This is merely a benefit of a coherent investing strategy but it is also one of the many ways that you maximize the power of your labor and money.
The same way that coupons let you maximize your purchasing power at the grocery store, tax incentives and other government-sponsored schemes makes your labor and earnings that much more powerful in the market.
Many employers have matchings programs because they, too, are encouraged by the tax apparatus to support employee saving and investing on a consistent basis.
5. Grow Your Net Worth More Aggressively
For most individuals, the prospect of starting a business is not only daunting but also sounds fraught with risk and misery.
If that sounds like you, don’t worry, there are other ways to grow your net worth aggressively.
Generally, starting your own business tends to be the only way to aggressively and significantly grow your net worth.
For example, even an author, photographer, or painter that sells a famous work of art is still considered to have their own business.
The other individuals are investors. The person who buys the art, photograph, or book is investing in the cultural capacity generated by the creator.
The truism of the market is that the surest way to financial wealth is to own your own business of almost any kind.
However, if you are like most individuals and don’t want to own a business, you can invest in someone else’s business and gain from their else’s market genius.
Therefore, if you harbor dreams of wealth but don’t want to start your own business, you do have the option to invest what you make and watch it grow.
6. Save For An Emergency
A savings account is great and you should have at least six months of fund sacked away in a savings account.
Yet, over time, you might want to save some additional money for a rainy day. A good option for that money is to put it in a very safe and boring investment instead of a savings account.
Well, for all of the reasons listed above.
You owe it to yourself to make sure your earnings work as hard for you as possible. The initial savings will always be there, and the invested funds are like a bonus at this point.
It should be emphasized that you should choose to invest over savings accounts whenever possible for reasons of financial efficiency.
One concept that was alluded to above is the inability of a savings account rate to keep up with the rate of inflation. As a result, it could actually mean that keeping your money in a savings account translates into you losing money each year in purchasing power.
7. Fund A Business Or Other Major Life Change
Maybe you will want to start a business one day or even go back to school.
It would be nice to have those dividends and gains from a stock investment, wouldn’t it?
You can use investments for way more than retirement and, in fact, they can meet any financial need you might have as far as big-ticket items go.
The concept of financial efficiency is emphasized and encouraged by timely and regular investing in stocks and other financial instruments. Doing so will help you change your mindset and tackle new challenges as they arise in financial matters.
You don’t know what the future holds, and you cannot control it. However, you do have some power over your wallet, and you should take charge by investing your hard-earned funds in the most efficient ways.
The realization that there are 86,400 seconds each day. What are you doing today, so that tomorrow you are a step closer to where you want to be? If not now, then when?
eightysixfourhundred, make them count
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