Why is investment important?

Why Is Investing Important

Not everyone saves for retirement, and even those who do don’t save nearly enough to see them through their retirement years. A 2020 Federal Reserve study shows that about 25% of non-retirees are not saving for retirement. However, everyone needs to invest to build wealth, beat inflation, and save for retirement and other financial goals.

No need to save huge amount of money in investment. Due to compound interest, you can earn money on all the accumulated interest from previous periods in addition to your initial invested amount. While everyone should invest, everyone has a different investment strategy that fits their personal and financial goals.

Learn what investing is, how much money you should invest, different investment strategies and where to start when investing.

What is investment?

Investing is the act of buying assets or goods with the goal of generating income and appreciation. Investments, which are assets or purchased goods, are used to create future wealth. Most often, these goods are in the form of stocks or bonds, but can also include real estate or alternative assets such as cryptocurrency or gold.

Why should you invest?

Investing your money is important for a few reasons. You want to build assets to help you in times of need, job loss, or future goals. You also want to take advantage of compounding while accounting for inflation, so your money isn’t worth less over time. Additionally, if you plan to stop working and retire at some point, it’s important to invest to help you achieve those goals.

Let’s examine some of the reasons why investing is so important.

Wealth creation

Wealth can mean different things to different people. It can mean a certain amount of money in your bank account, or it can be defined as specific financial goals you set for yourself. Either way, investing can help you get there.

If your goal is to pay off debt, send your child to college, buy a home, start a business, or save for retirement, investing can help you achieve those goals faster than money accumulating in your bank account. By investing, you can build wealth, which is an increase in the value of all your assets.

Wealth creation is not just a goal that can help you throughout your lifetime. You can leave behind a financial legacy by building generational wealth through investing. Generational wealth can not only provide a strong financial footing for your children, but can be a step towards closing the wealth gap faced by many communities.

Combination

With investments, you can avail compound interest. Compound interest is the interest you earn on the money you invest and the money you earn in each previous period. It is sometimes called “interest on interest”. Compound interest allows you to grow your wealth faster. For example, if you invested $50 per month for 15 years, your total contribution over that period would be $9,000. Assuming a 10% rate of return, the $9,000 will grow to $19,000 over that period due to compound interest.

To beat inflation

Inflation refers to the overall increase in the price level of products over time. If prices are rising over time, that means your money buys less today than it did yesterday. If there is inflation over a 30 or 40 year period, your money will be worth much less while the cost of living has increased. One way to beat inflation is to invest your money. If your money earns more than the inflation rate, this means that your money is worth more tomorrow than it is today.

Retirement

If you plan to stop working and retire, you need to save a large amount of money to live on while you are not working. Investing can help bridge the gap between what you save and what you need to live on for 20 or 30 years.

To start saving for retirement, you can start working later than the number you set for retirement savings. That number can be determined by thinking about how soon you want to retire, and what kind of lifestyle and expenses you will have in retirement. Then you can come up with an investment strategy for retirement that aligns your current financial situation with your retirement goals.

How much money should you invest?

While you can invest for short-term goals like buying a home, most people invest to fund their retirement. In the US, people generally choose to retire around age 65 if they are financially able. This means that to last their lifetime, they have to rely on their investments to fund their lifestyle. There are still expenses that must be paid in retirement, such as utilities, housing, food and any travel.

To figure out how much you should invest now to fund retirement or other goals, financial experts suggest a few different methods 

Save 20% of your paycheck

Some experts suggest saving 20% ​​of your paycheck. That means you can live on 80% of your income for your housing, needs and wants. This method is used by many people to make it easier to set aside a portion of their money in each paycheck. In most cases, you can automate 20% of your paycheck to go directly into an investment account each month, making this method one of the most convenient methods to use. However, it may not be possible for everyone.

4% rule

Another rule of thumb that many financial experts use is the 4% rule. That suggests that by withdrawing 4% of your retirement fund each year, you’ll have enough money to live on, while generating enough returns to maintain its current value even after adjusting for inflation. 

For example, if you have $1.25 million in retirement savings, you can withdraw $50,000 in the first year, according to the 4% rule. The following year, you should be able to withdraw another 4% of the remaining balance, and the cycle should continue for each year you live in retirement.

This rule is useful because if you can estimate your annual expenses in retirement, you can work backwards from this amount, and determine how much money you need to save each month during the time you have left until retirement. can

One investment strategy does not fit all

Your investment strategy is individual and should be based on your goals and risk tolerance. You may have some short-term goals, such as buying a car or a home, and some long-term goals, such as saving for retirement. 

Understanding your personal risk tolerance is important because different people are willing to accept big changes in the value of their investments, while others panic if the investment value drops.

Often, the investment is recouped in the long run. The S&P 500, one of the major stock indexes people track, has returned 12% annually over the past 10 years through March 2022. 2

If you are uncomfortable with risk, this will shape your investment strategy towards more diversified or short-term assets. Long-term investments can be risky in some assets because there is more uncertainty over a longer time horizon; However, for some assets, longer investment periods can help average out periods of outsized short-term gains or losses.

Finding your personal investment strategy can take some time, and most investors adapt their strategies because their life circumstances are different and can change over time. For example, younger people are riskier in their investments, while older people are less risky because they have fewer working years to recoup investment losses.

Bridging the Wealth Gap

Investment can also help people and communities who often have the deck stacked against them when it comes to financial opportunities due to wealth disparities.

Women, for example, will generally need to invest more and longer to meet retirement goals, because they are often paid less than their male counterparts for the same job, and because the global average life expectancy for a woman is seven years. is Long  3  Although research suggests that women are better investors than men, they tend to be more conservative in their investments, so taking a more proactive and aggressive strategy can benefit women.

Individuals in black or Hispanic communities are known to have fewer resources and wealth, which is exacerbated by racial wealth disparities. According to the 2019 Survey of Consumer Finance, black households had 7.8 times less median household wealth, and Hispanic households had 5.2 times less median household wealth than white households. Investing can be a small step to help reduce this wealth gap.

How to start investing

You don’t need thousands of dollars to start investing. You can set aside some money every month to start your investment journey. Let’s think of a simple example where you set aside $100 every month from age 25 to 65.

If you put this money into your checking account, you’ll have $48,000 ($100 x 12 months x 40 years) in 40 years. = $48,000). However, if you invest the money and earn a 10% annual interest rate compounded annually, your $48,000 will grow to more than $530,000. Your money builds money over time.

You can start investing by talking to your employer to see if they have a retirement account like a 401(k) or 403(b). You can contribute a portion of your paycheck each pay period to your retirement account and start choosing the investments that are offered to you. If you are not offered a retirement account by your employer, you can also invest in an Individual Retirement Account (IRA).

You can open one at a brokerage firm or an online brokerage firm such as TDAmeritrade, Wealthfront, or Charles Schwab. At a brokerage firm, you can also open a private investment account to start investing. Like retirement accounts, these types of accounts don’t incur penalties if you withdraw your money before reaching a certain age, but they also lack some of the tax benefits that come with retirement accounts.

Why is investment important?

Leave a Reply

Your email address will not be published. Required fields are marked *

Scroll to top