For Financial Literacy Month we’re looking at some investing basics that could be helpful if you’re just getting started with investing, or if you’ve been investing for years. We’re starting out today by looking at why you should invest.
Most people with a financial plan or financial goals, need to include investing in that plan. Maybe you think investing is only for rich people or isn’t necessary to achieve your financial goals. Investing is just as important for those with modest incomes who may need to take advantage of the potential financial growth investing provides to reach their financial goals.
If you’re not investing maybe you’re simply saving by putting money into a saving account or holding it in a piggy bank or safe at home. Saving does have its place in your financial plan, but so does investing. Saving and investing are different and should be used for different parts of your financial plan and achieving your goals.
Investing can be necessary because when you’re simply saving your money loses purchasing power over time. For example, let’s say you saved $1,000 two years ago by hiding it under your mattress. As long as no one steals your money you’ll always have your $1,000 close at hand. However, due to inflation (which has been quite high lately) what you can purchase with that $1,000 today when compared to what you could purchase with it two years ago has decreased. Inflation eats away at the purchasing power of money that you save.
If you have invested this $1,000 in some type of investment product such as bonds, stocks, or investment funds you are giving your money the chance to maintain or increase in value over time. This is one of the foundations of investing – put your money to work and passively increase it’s value. For many people this is especially necessary for long-term financial goals like retirement.
As we said in a previous blog post, it’s practically impossible to save $1 million for retirement without investing because you’d have to save $25,000 a year for 40 years to secure that amount. Most people do not have the financial means to put aside and save which is why investing and growing your money is essential. Investing does not come with a guarantee that you’ll earn money, but it at least gives you the possibility.
Before making any investment always make sure it fits your investment goals and risk tolerance. While investing for retirement is important, make sure you properly balance the investments you’re making and your risk to ensure it does not negatively affect your current standard of living and put you on the right path to reach your financial goals.