Why Should I Invest
You might be asking yourself, “Why should I invest?”
Simple! You want to invest to create wealth. It’s painless, and the profits are plentiful. By investing in the stock market, you’ll have a lot more money for things like retirement and fun. Or, you could be that great ancestor revered for generations because you passed down immense wealth.
Whether you’re starting from scratch or have a few thousand dollars saved. You should invest for financial health, freedom, and independence.
What is your “Why”
What is your reason for “Why should I invest?”
What are you saving for? Why do you want to invest?
- College for the kids?
- A haircut?
- To live large?
- Financial independence?
or maybe you don’t know why you want to or should invest!
Having a clear goal in mind is important. Otherwise, why do it? That investment goal needs to align with your personal and life goals. It’s #7 on the 10 Most Important Things You Must Do To Start Investing.
One of the key principles of investing is to never invest without a purpose.
You can’t assess your time frame for investing and how much risk you’re willing to take without a goal. Both of which are vital questions when it comes to investing.
Seeing the Returns
Let’s dive into your savings account and take out $2,000 to put into the stock market. If your money returned 10% a year, the S&P 500’s historical average. That two grand would be worth $34,898.80 after 30 years. That might not get you the perfect retirement home, but it’ll give you a down payment.
Maybe you don’t have $2,000 sitting in your bank account, but perhaps you can afford to invest your beer money. Instead of a case of a beer, buy a 6-pack and store away $4 a day, 250 days a year. It’s not a lot, but if you’re in your early 20s, you’ve got the investor’s best ally on your side – TIME.
If you invest $1,000 once a year in an investment that averages a 10% annual return, which is the average annual stock market return since 1926. It’ll grow to more than $1 million after 46 years, which is right around the time you’ll be ready to retire.
Of course, as you get older and more financially stable. You should be able to put away more to invest. Upping the ante to just $166 a month which is less than a case of beer, plus what you pay for streaming services. After 39 years, that $166 would grow to hit the million-dollar mark. Pretty awesome, right?
Investing isn’t a hack to immense wealth. Nor will you see winning results right away. If you’re a seeker of instant gratification, investing won’t fill that void. However, in the long term, it’s the recipe to financial freedom and independence.
Compound interest is the reason many investors are so successful.
Compound interest refers to interest payments that are made on the sum of the original principal and the previously paid interest.
An easier way to think of compound interest is that is it “interest on interest.” Where the amount that the interest payment is based on changes in each period, rather than being fixed at the original principal amount. Confused yet? Here is a fantastic article all about it!
When your investment gains (returns) begin to earn money, and then those returns start to earn money, your investment can blossom very quickly. Extend the time period or raise the rate of return, and BOOM! Your results increase exponentially.
See the Growth
Now let’s take a real-life example. Let’s compare two high schoolers and their lifetime savings habits. Sara babysits a lot and plays sports in her spare time. At 15 years old, she saves $1,000 a year and invests it in the stock market for 10 years. Earning 12% per year on average. After 10 years, she stops adding money to her nest egg and spends every penny she earns traveling the world. But she keeps her nest egg in the market untouched.
Compare her account to that of her friend Patty, who squandered her early paychecks on clothes and make-up. At age 40, Patty gets a wake-up call when her parents retire on nothing but Social Security. She starts vigorously saving $10,000 every year for the next 25 years.
Guess who has more at age 65?
That’s right — Sara! (You probably figured it was a trick question!)
Her 10 years of saving $1,000 per year (just $10,000 total — the same amount Patty put away in just one year) netted her $1.8 million by age 65. Patty, on the other hand, scrimped for 25 years to invest a quarter million dollars and ended up with just under $1.5 million.
Neither will be poor, but you see my point. Sara’s babysitting money grew for 50 years which was twice as long as Patty’s.
The power of compounding is the single most important reason for you to start investing right now. Every day you are invested is a day that your money is working for you. Helping to ensure a financially independent and secure future.
Common Investor Mistakes to Avoid
Before you jet off to read Investing for Beginners 101 and start investing. There are some common pitfalls to avoid. These are common mistakes many people make when considering investing. (These are the 3 Most Common Investor Mistakes).
- Doing nothing. There is no guarantee that the market will go up the first day, month or even year you invest. But there is one guarantee. Doing nothing at all will lead to an uncomfortable retirement.
- Postponing the start. Postponing your investing career is second only to not investing at all on the list of investment sins. You already know that the earlier you start the better off you are. Take another look at the compound return example I gave above. Or read this article.
- Investing before paying off credit card debt. If you have money in your savings account and have considerable debt on your credit card. Pay it off! You will never get a return higher than the 18% interest from your credit card. Pay the debt off first, then think about investing.
- Investing short term. Invest money in the stock market that you won’t need for at least three years or longer. If you’re saving for a down payment on a house or car for next year. Use a short term investment account such as money market funds, high yield savings account or CDs.
- Free money match. Would you turn down a free dollar? Probably not unless it was from a creeper. If your company offers a 401(k) or similar retirement plan with employer match and you’re not participating. You’re essentially turning down FREE money. Make sure you participate and take advantage of all tax-advantaged, employer-matched savings programs.
- Playing it safe. If you’re young, most of your investing dollars should be in the stock market. You have enough time to ride the market dips and reap the rewards of long-term gains. When you get closer to retirement, you may want to transition into bonds but stocks should make up a large portion of your investment portfolio.
- Risky investments. Not every investment is for everyone. Look at the football players who lost millions investing randomly. Even if you’re a daredevil, you shouldn’t put all your eggs in one basket.
- Viewing collectibles or lottery tickets as investments. If old comic books, beanie babies, and Pokemon cards could be used to fund retirements, do you think the stock market would exist? Probably not. Don’t make the mistake of thinking your baseball cards, those Norman Rockwell plates and lottery tickets will provide your retirement.
- Trading in and out of the market. Long-term investing is the best approach. Pick proven investment funds and stocks — you’ll reap greater rewards over the long term. Trade-in and out of the market and you’ll be burdened with fees that chip away at your returns. Set it and forget it.
Why Should I Invest Conclusion
There are only two ways to make money in our marvelous world. By working either for yourself or someone else — and/or by having your assets work for you. If you keep your life savings in your back pocket or under a mattress instead of investing. The money doesn’t work for you and you’ll never have more than what you save or receive through inheritance. Investors, on the other hand, generate money by earning interest on what they invest in (i.e. stocks) or by buying assets that increase in value.
As I mentioned in #2, it’s never too late to become an investor. You may be well into your 30s before realizing that life is moving quickly, requiring a plan to deal with old age and retirement. Fear can take control if you wait too long to set investment goals. But guess what? That will go away once you set the plan into motion.
Remember that all investments start with the first dollar, whatever your age, income, or outlook. That said, those investing for decades have the advantage, with growing wealth allowing them to enjoy the lifestyle that others cannot afford. Get started now!