Investing is one of the best ways to grow your money and build your wealth. In this chapter, we outline seven reasons why you should start investing.
Most people are taught to save and invest money at a young age. However, the majority of them don’t start to invest until they’re in their 30s and 40s.
As a young person, you may not yet have many financial options. However, there are many reasons why you should begin investing while you’re young, like the fact that you have a lot of time to make your money grow. Your long time horizon is a significant advantage that will allow you to retire with a bigger nest egg or reach other financial goals earlier than others. Therefore, it’s essential to start investing as early as possible.
There are many reasons to start investing, but here are seven reasons you should start investing.
You might have many financial goals that you plan to achieve. Some of them may be closer in time, like saving for a new phone, while others may have a much longer time horizon, like having enough money for retirement or buying your own apartment.
While saving will be more suitable for achieving your short-term goals, investing can help you achieve your long-term goals. When you invest, you purchase assets that you expect to increase in value or pay out income to you. As a result, the more you invest, the more your money will accumulate. You can use this growth potential to your advantage and increase your available funds through investing and to achieve your financial goals.
The growth potential of your investments has another positive side effect: As the value of your assets grows, so does your financial independence. If you invest as much as you can consistently, you can build up wealth and make more independent financial decisions. Therefore, money will no longer be a limiting force on your life, and instead, new possibilities will open up.
Investing can also allow you to achieve financial independence by setting up multiple income streams. For example, the average millionaire earns money from up to 7 different income streams, according to the IRS.
Having multiple streams of income can significantly improve your financial independence. Your other income sources can act as a fallback if another income stream is gone. For example, if you rent out real estate, you can still fall back to your rental income if you lose your current job.
The most common complaint by older investors is that they wished that they started at a younger age. Warren Buffet is probably the most famous example of this. He started to invest at the age of 11, yet he wished he would’ve started sooner.
The main reason why many investors share this sentiment is that with every year that you don’t invest, you have less time left to compound the value of your portfolio. When an investment compounds, the value increases exponentially. Therefore, the longer you invest, the more the value compounds itself.
As a young investor, you may not yet have substantial sums of money to contribute. However, you still have the most significant asset in investing: your time. The earlier you start to invest using a long-term strategy, the more the value of your investments will increase. In the long term, you will significantly outpace other investors who started at a later point in life while having to take fewer risks.
You might be afraid to start investing because you fear making mistakes and losing money. The truth is that you most likely will make mistakes and lose money at some point. However, as a young investor, you can afford to make a few mistakes. Especially in the beginning when you’re still learning about investing.
As we mentioned previously, time is your biggest asset. And any mistakes you make can still be fixed given enough patience because you still have enough time to compound the value of your investments.
In some years and market environments, it might even be hard to avoid losing money because of the overall state of the market. This is entirely normal, and as long as you don’t panic sell and perform thorough research on your investments, you will be able to get into positive territory again. These market downturns often also provide excellent opportunities to purchase assets at cheaper prices and to “buy the dip”.
Nowadays, it has gotten much easier to start investing as many brokerages have set up easy-to-use, beginner-friendly apps with zero commissions or very low fees. Often, all it takes to start investing is to set up an account with an investing app and transfer some money to it.
In addition, beginner investors can start investing without having to perform detailed research or picking their investments. Instead, you can purchase so-called index funds and exchange-traded funds (ETFs), which mirror the performance of a subset of the market through a market index. Because they mirror the performance of an market index, you will be guaranteed to make the average expected return for a given year and the given market segment. While this doesn’t allow you to outperform the overall market performance, you also won’t underperform it.
Inflation is the general rise in the prices of goods and services and the associated decline in purchasing power. It is mainly caused by an increase in the total money supply or the increased demand for goods and services by consumers. Rising inflation means that the value of your money decreases as you can buy fewer goods and services with the same amount of money. As inflation decreases the value of your money, you should take measures to counteract this decrease. For example, if the annual inflation rate is 2%, your investment return has to match this rate to avoid a loss in value.
Saving money often cannot outpace inflation as your savings account usually only offers insufficient interest rates. On the contrary, investing can help you outpace inflation as you can achieve much higher returns. For example, the S&P 500 market index offered a 27% return in 2021 which outpaced the inflation rate of 7% by a wide margin.
If you invest in stocks, you become the owner of a part of the company whose company shares you bought. As a result, you receive rights to a portion of the profits of that company and the right to vote in shareholder meetings and influence the company’s decisions.
So-called activist investors use their voting rights to force companies to support specific causes. For example, they might push oil producers to invest in clean energy and counter climate change. While you will not be able to acquire significant shares of a company, every small investment can make a difference in supporting causes that are important to you and make a change.
Continue with the next lesson of our beginner-friendly guide “Basics Of Investing”.