For decades now, the general consensus has been that it is always a good idea to start investing, no matter what your financial situation is. Fortunately for us, this general consensus still stands true today. Investing is a great idea and is something everyone should do.
Investing will only open doors for you and give you the financial freedom that you deserve.
So why don’t we just get right into things, here are the top 8 reasons why investing is a good idea.
|Top 8 Reasons Why Investing is a Good Idea|
|1. To Generate Compound Returns|
|2. To Outperform Inflation|
|3. To Save for Retirement|
|4. To Build Wealth at a Pre-Tax Rate|
|5. To Generate Tax-Free Investment Returns|
|6. Investing Has a Low Barrier to Entry|
|7. To Achieve Your Financial Goals|
|8. For Overall Financial Security|
1. To Generate Compound Returns
When you invest and make money, as long as you don’t continually cash out your returns, you’ll automatically start taking advantage of compound interest.
In short, compound interest is where your returns continually get reinvested into your portfolio which will result in exponential growth of your money over time. Some people also refer to it as “interest on your interest”.
I talk a lot more about compound interest in my article Do Stocks Earn Interest?
For example, imagine two people put away $400 from their paycheque each month over 40 years. One person invests their money and generates an 8% return each year while the other saves it and only earns 1% a year.
The person who invested their money (8% return) would have $1,396,403.13 after those 40 years.
While the person who saved their money (1% return) would only have $235,956.59 after those 40 years.
That’s why investing money is such a good idea. Despite both contributing the same amount of money over 40 years, $192,000, one ended up with over 1 million dollars more than the other. Crazy hey!
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2. To Outperform Inflation
Another reason why investing is a good idea is so that you don’t lose money by having it sit in cash.
Whether you know it or not, inflation is constantly eating away at the value of your money every year. On average, your money loses one to two percent of its value every year from inflation. This means that you must at least make 1% – 2% every year just so you don’t LOSE MONEY. Isn’t that crazy?
As I stated earlier, if you use a regular savings account, you will never keep up with inflation, meaning that you will need to find other means of increasing your wealth to keep up with inflation. Luckily investing has proven to be a great way of doing this, returning far more every year than what is taken by inflation.
3. To Save for Retirement
Whenever you open your investment account, you will be able to start saving for retirement.
Of course, you should constantly invest money each month, but making sure that the money in your account is going towards your retirement fund is crucial.
So if you’re Canadian, invest in an RRSP when you’re investing for retirement. Here is an article I wrote on the Top 9 Benefits of an RRSP.
Related Financial Geek Article: 15 Tips and Tricks to Retiring Early as a Canadian
If you’re an American, save for retirement in a 401k in order to build wealth using pre-tax income. Will talk about this more in the next section now.
4. To Build Wealth at a Pre-Tax Rate
Whenever you open up a 401k, you’ll be able to invest your income before you are taxed on it. 401k’s are the equivalent to an RRSP in Canada as they are government registered investment vehicles.
These accounts are excellent for those who take advantage of them as growing your retirement nest egg at a pre-tax rate, over the course of a few decades, could quite literally save you hundreds of thousands of dollars.
5. To Generate Tax-Free Investment Returns
While a 401k will allow you to push your taxation off for decades, a Roth IRA will also allow you to grow your money completely tax-free. When you open up one of these accounts, you will have the ability to grow your money without ever having to worry about giving your earnings over to Uncle Sam (the government).
To learn more about the Roth IRA, check out Investopedia’s article here.
So, make sure that you are making the most of your investment portfolio and open up a Roth IRA in order to grow your investment’s tax-free.
The equivalent account to this in Canada would be a TFSA. To learn more about the advantages and disadvantages of the TFSA, check out my article here.
6. Investing Has a Low Barrier to Entry
One of the main reasons investing is a good idea is because it’s barrier to entry is so low. You can literally start investing with as little as $1 with some companies.
Not only that, but they’re a lot of online brokerages available today where you can invest simply with the click of a button.
Companies like Wealthsimple and Robinhood have given investors the ability to invest with such ease now that it has truly revolutionized the financial industry.
For decades there were massive delays between news hitting the market and then news affecting it, but now the moment news hits, the market reacts.
Lastly, these modern platforms have given investors advanced tools that they can have at their disposal to analyze individual stocks and create financial forecasts which will increase their chances of solid returns.
7. To Achieve Your Financial Goals
No matter the size, everyone should have financial goals.
These goals will significantly differ in size from person to person, but they can all likely be obtained through investing.
If you only work a 9-5 without any additional sources of income it’ll honestly be hard to retire comfortably, but by investing a portion of your income each month, you’ll see immense growth in your wealth and net worth over time, allowing you to retire comfortably at a reasonable age.
Do you really want to be cleaning tables at Burger King in your 60s? I don’t.
8. For Overall Financial Security
While financial security is highly sought after in today’s world, the unfortunate truth is that not everyone will find it.
But if you invest your money wisely over time, you’ll be able to secure your financial future. Bottom line.
Investors have historically seen an average return of anywhere from 7% – 10% for decades now. This vastly outperforms money market funds and savings accounts which, let’s face it, hardly outperform inflation.
As a long term investor, you are giving yourself the opportunity to significantly increase your quality of life as you get older.
The Bottom Line
Investing is a good idea. Sorry, investing is a GREAT idea and is something I recommend everyone do.
For the reasons discussed above, if you haven’t started investing yet, now would be the time!
Not only does investing set you up nicely for retirement, but just knowing your financial future is somewhat taken care of is great for internal peace of mind so you can enjoy the current moment just that much better.
As always folks, thanks for reading!