The Market Grew 27% Last Year..
And You’re Missing Out
You decide whether to save or to invest your money. While saving does not do much for your money, investing is a powerful way to put your money to work to make more money. If you had invested your money into the S&P500 index last year and did nothing, it would have grown 26.9% in just a single year.
While 2021 was an exceptional year for the stock market, investing, in general, is great for increasing your wealth. Here are 5 reasons why you should invest a chunk of your money.
1. Money can work for you
Money that you don’t use and stall on the bank is useless and becomes less valuable over time. I’m not announcing that you should empty your bank account and hurl every penny in the stock market. You should have an emergency fund and you should save money periodically for your big purchases such as a house. The message I want to convey is that you should consider investing all the money that you will not be touching short- and mid-term.
You can either use fundamental or technical analysis to decide which stock you want to invest in. And you shouldn’t blindly invest in stocks, as there are also parameters for choosing a winning company. Individual stocks and ETFs tracking indexes such as the S&P500 can increase in value as well as pay out dividends. This enables your money to work for you instead of you constantly working for your money.
2. You’re losing money right now
It’s impossible to avoid it: inflation has been on the rise and it hit 7% in December 2021. This is the highest level of inflation in 40 years. As increasing prices of products and services mean higher expenses, you can buy less with the same amount of money.
To give you an idea of how inflation has worked out: if you could purchase an item for 1 USD in 1982, then that same item would be 2.89 USD in 2021. The price of an item has almost increased triple in value! And unless your money in the bank has made the same increase in the last 4 decades, you’re not able to buy as much with the same amount of money as you could.
Imagine if you would have saved 100.000 USD in 1982 then this would still be the same 100.000 USD in 2021. However, due to inflation, the items that you could buy in 2021 would in reality only leave you with a purchasing power of 35.809 USD. Inversely, you would need at least 279.263 USD in 2021 to make the same purchases as you could in 1982.
Your money should have at least grown 2.7% annually to keep up with inflation to maintain your purchasing power. Everything below is a loss in reality.
3. Saving doesn’t do you any good
Nowadays you are lucky if you can find a savings account with 0.5% interest in the EU and the US while many banks do not offer any interest anymore. Some European banks even charge you for stalling money at their banks and they do not rule out negative interest.
While we can hardly keep up with average inflation of 2.7% (let alone 7%), we are already paying to stall money at the bank. And saving your money at the bank or home isn’t saving it, you’re actually losing it slowly.
4. Benefit from compound interest
Compound interest is the interest based on both the initial sum invested and the accumulated interest. It is the result of reinvesting interest rather than shaving off the interest that your investment generates. By reinvesting your accumulated interest, you will make your investment gain more value over time.
You can compare it with the snowball effect. If you invest an initial sum of 10.000 USD and add 500 USD monthly over 30-years while taking out the interest will only result in 190.000 USD. While compound investing against a growth rate of 9.8% annually under the same conditions will result in more than 1.2 million dollars (1.290.532 USD). This huge difference can be attributed to the concept of compound investing. In case you want more information on the power of compound investing, read the article on 3 scenarios of investing in the S&P500.
5. You’re missing out on valuable investment experience
The current educational system lacks essential subjects important for life such as budgeting, taxes and investing. This creates a society where more than half of UK and US adults are lacking financial literacy and the situation where making financially irresponsible decisions are the norm rather than the exception, and this has painful consequences.
By gaining investment experience and reading into investing, budgeting and taxes, you can make financially better decisions throughout your life. A strong financial fundament will positively impact your everyday decisions and reduce financial stress, which leads to better mental health. Learning and gaining experience on how to make informed and effective decisions with your financial resources early on in your life is a huge asset that helps you build your wealth rather than just consuming it.
One of the qualities of money is that it can work for you, and we must learn how to use this attribute to manage money instead of merely saving paychecks and letting its value decrease over time.
