Like it or not, money plays an important role in our society and creates financial security and wealth for your future. Making smart investment moves early in life can pay off big time.
However, understandably, it can be hard to get excited about investing especially if you’re young. It can be more tempting to spend money on things that bring us instant gratification over long-term benefits. However, investing at a young age can be the smartest and easiest way to build massive wealth long-term.
But regardless of your current age, it’s never too late to invest your money to fund your preferred lifestyle and build financial security.
In this article, we’ll discuss five powerful reasons why investing is so important and how you can get started.
What is investing?
In short, investing means putting money into different types of assets – such as stocks, property, precious metals or business ventures – with the expectation that you will archive a gain or profit from these investments.
In this context, we will particularly focus on the power of investing in financial products such as stocks, bonds and mutual funds. However, the reasons why investing is important equally apply to other forms of investments too.
Investing vs saving
The line between investing and saving can sometimes be blurred but it’s important to understand the difference. When saving, you’re setting aside your money for a later date or a specific goal such as a wedding, first home or new family member. Investing on the other hand means putting your money to work to potentially earn a better return in the long run.
Saving is a good starting point in investing because it provides the funds you need to purchase a range of different assets. However, investing goes one step further, helping you to build wealth and achieve personal goals like financial freedom.
Why is investing important?
You work hard for your money so your money should also work hard for you. Investing is an essential tool to make this happen. Now let’s discuss why investing is so important. Here are five powerful reasons why everyone should start investing.
1. Grow your money and build wealth
Have you ever heard of anyone who got rich by saving money from their 9-5 job salary? No, you probably have not. This is because it’s virtually impossible to build significant wealth with an activate income only.
In order to build wealth, you need to learn how to grow your money. Investing is one of the main tools to do this. Most investment vehicles, such as stocks and funds, offer returns on your money over the long term. This is mainly due to the power of compound interest.
In simple terms, compound interest means that you begin to earn interest on the interest you receive, which multiplies your money at an accelerating rate. In other words, if you have £1,000 and earn 10% in interest, you have £1,100. Then, if you earn 10% of interest on that, you end up with £1,210 and so on. Eventually, your original £1000 is eclipsed by the amount of interest you have gained.
This return allows your money to constantly build, creating wealth over time.
2. Beat inflation
Holding all your savings in your bank account might seem like a safe option, however, in a low-interest-rate account, your funds will barely grow. In fact, by having your money in a normal bank account or in cash, you end up losing money long-term due to inflation.
Inflation is the ongoing rise in the cost of living over time, which can have a surprisingly significant impact on your financial position. Inflation can eat into your hard-earned savings as it can impact your purchasing power. Even if your cash savings have gained a little interest, the money in your pocket could be worth less due to inflation. For example, that £3.50 morning coffee can soon be costing you over £4.
One way to help outpace inflation, and generate positive returns over the longer term, is by investing in assets that are not just capable of delivering higher income returns but also offer the potential for an increase in value.
3. Save for retirement
Did you know that the average middle-class American need to save at least $1 million to retire comfortably? Yet, retirement is probably one of the least interesting things people want to plan for, especially at a young age. However, retirement savings should be something to think about from the day you enter work life.
Most people rely on their salary for meeting their needs and maintaining their lifestyle. But it can become very difficult to sustain your lifestyle after retirement when you don’t have a regular income anymore. This means that it’s essential to invest a part of your income during working years to ensure a nest egg once you retire. While the government and employers used to give generous pension benefits to employees before, now the main responsibility for pension savings is on the employees’ court.
4. Reach your life & financial goals
Investing is one of the key ways to help you to achieve your financial goals. When your money is earning a higher rate of return than a savings account, you will be earning more money both over the long term and within a faster period. This return on your investments can be used towards major life goals, such as buying a first home, starting your own business or becoming financially free and retiring early.
5. Get tax benefits
Investing can also help in saving taxes as there are accounts where the taxes on your investment gains are lower or non-existent. One example of these accounts is Stocks & Shares ISA in the UK. S&S ISA allows you to invest a maximum of £20,000 each tax year completely tax-free. This means that once you want to pull out the cash from your investment account, you don’t pay dividends, capital gains or income tax on any gains or income.
As governments reduce their responsibility towards funding their citizens’ retirement years, they have created these types of accounts to help people to contribute and fund their own retirement.
When should I start investing?
For most people, the best time to start investing is right now! If you have some money you’re not planning to spend for a few years, it’s worth considering investing to produce the highest returns for your money.
For example, investing in stocks or property can offer a good opportunity of growing your money over the longer term. Keep in mind that it’s a long-term investing approach that is generally providing the most benefit. Whether you start paying into a personal pension when you first enter employment or invest in a Stocks & Shares ISA, the earlier you start the better. Even small regular payments each month into investment funds can result in a sizeable pot after 20, 30 or 40 years.
However, before you start investing, it’s important you have your basic finances in order. Make sure you have paid off any high-interest debt (such as credit cards or consumer loans) and built an emergency fund before you start your investing journey. This allows you to have some savings kept separate which are immediately accessible to pay any unexpected expenses.
How do I start investing?
Here are four simple steps to start investing:
- Find a broker and set up an account. Choose a low-fee broker that offers funds, such as Vanguard.
- Open a tax-advantaged account. For example, Stocks and Shares ISA in the UK or Roth IRA in the US.
- Choose a low-cost index fund or ETF, such as S&P 500 or FTSE 100. These indices track the performance of the biggest companies in their respective countries, meaning you don’t have to buy different company stocks individually.
- Set up a monthly automatic investment payment. You can also add additional lump sums when you have more money available. For example, if you get a bonus at work, cash as a gift or a tax return.