Why is Investing Important?
Budgeting and saving is all very important, saving more than you spend and having money for a rainy day is great. You can save up for nice holidays, or a new car, or even a house.
However the silent killer is inflation – your buying power with that saved money buys less and less each year. For a deeper dive into inflation – click here.
Not doing anything with your money and leaving it to decline in value is a big negative over time.
Missing out on compounded effects by not investing is also a big negative over time. Like Albert Einstein once said “Compound interest is the eighth wonder of the world. He who understands it, earns it.. He who doesn’t… pays it.”
By investing your money, you allow it to compound over time. It is the eighth wonder because it allows your money to grow exponentially over time. Because of its exponential growth – the longer you invest for (the earlier you start) the higher the returns at the end.
Case Example #1
Let’s say the goal at age 65 is to have a million dollars and you invest your money monthly into a fund that returns 7-8%.
If you start at age 25 – there would be 40 years for investments to grow – you would need to invest $325 per month.
If you start at age 35 – there would be 30 years for the investments to grow – you would need to invest $655 monthly
If you start at age 45 – there would be 20 years for the investments to grow – you would need to invest $1554 monthly
Waiting just 10 years from 25 to 35 means you have to double your monthly investment to reach the same goal.
You can see – time is the greatest asset- 25 year old doesn’t just have to contribute less each month- they also contribute less overall and still end up with the same 1 million – magic of compound interest
Case Example #2
Kristine is 25 and reads auspersonalfinancebuddy on the weekends and she starts to invest $500 dollars every month until she retires at 65. (assuming a modest return rate of 7%) – she has $1,160,000.
Steven is also 25 and does not read auspersonalfinancebuddy. He starts to put away $500 dollars every month into a high interest savings account until he retires at 65. After 40 years he has $466,000.
A whopping $934,000 dollars extra.
Summary
Your future self will thank you for starting today, even if its a small amount.
So why doesn’t everyone do this? Is it risky? Should I do it? What’s holding me back? Answering these questions is crucial to breaking down the barrier to investing.