You’ve probably wondered about it at some point in your life. Probably even just now. Who has not asked themselves: “Why should I invest?”. It’s not a philosophical question but rather a very logical one. Everybody should think about it, a bit seriously, or not when considering what to do with earnings or savings that accumulate slowly in bank accounts. You see many people on TV and in magazines that invest in stocks successfully for many years — great investors like Warren Buffett. You might hear about ETFs and mutual funds on podcasts and videos or read about various investments in blog posts.
Investments are everywhere. Then, you might logically think that maybe you should invest as well. Why not, after all. Why wouldn’t you get a slice of the money pie? There are several reasons why the money you have in your bank accounts should just not be sleeping there, like hibernating. Money should never sleep. Time to wake it up. Let’s have a look at why should you invest?
That is something that is often overlooked: the need to beat inflation. You don’t need to be the Chief Economist of the International Monetary Fund to understand that inflation, although a natural phenomenon in economics, is not particularly good for your money. Inflation is the general increase in the prices of goods and services. In shorts, one dollar has less value one year from now. And even less beyond. That’s something often referred to as the time value of money: it’s better to get $100 now than in the future because of inflation.
This concept is fundamental to grasp while investing. Because if you do not get returns above the inflation rate, you are losing money. Think about inflation as a negative interest rate on your money. The longer your cash is idling, the more value is lost to inflation. It becomes your hurdle rate: you need to beat it and stay above it constantly. The higher the inflation rate, the more returns you need to generate.
These returns can be generated through savings accounts, buying shares or investing your money in many other ways – better than no ways at all. The only real solution to beating inflation is by putting your money to work, working as hard as it possibly can. That can be by buying shares on the stock exchange or spreading your money across different types of investments. Just do it.
The magic of compounding… is actually not so magical. You do not need to be a wizard to see your wealth compound over time. Even though it looks like it is straight out of Hogwarts, in reality, it is not that complicated to understand. Long-term investing is so powerful because money compounds over time. It is pretty simple, though; money generates returns when invested. That additional returns add to the initial investment. Therefore, the investment is larger, and you are putting more money to work overtime. It will grow much faster. The upside potential increases with time.
Long-term investing is the secret to compounding wealth. It is a key piece as you project yourself in decades to come. That is how rich people get wealthy in the first place and stay rich as time passes. Decades and centuries even. It might seem out of reach, or somehow they are doing something complicated, but it is mostly about compounding. Because, spoiler alert… It takes time. The sooner you start, the better. You need to save money and invest it consistently. That is the only way to build wealth over time.
Inflation slowly eats your wealth over time, and one great way to prevent that is by doing everything you can for it to compound. A simple way to do that: invest.
Generate Passive income
People often mention that the secret to building wealth in the long term is to generate passive income. How would you do that?
A bit of investment planning, which does not need to be as boring as it might sound. There are various ways to generate passive income. It is deemed passive if income is generated regardless of whether you are working or not. That’s beautiful when it happens. That’s what most people refer to when they say that “Money never sleeps” because the ultimate goal is to make money while you sleep.
Imagine waking up in the morning, you grab a coffee, and you check your bank account: more money is there than the previous day. That might sound too good to be true, but it is actually not such a weird phenomenon. By investing consistently and across a wide range of investments, you slowly but surely build this capacity to generate passive income. It is the ultimate goal because active income is somehow limited: there are only so many hours during the week and so much that someone is willing to pay for a job done. Passive income does not have this kind of limitation. The bigger the amount, the more the income will grow.
If you have not done so yet, it is time to start investing. There are many more reasons why putting your money to work for you, rather than the other way around, should be something that you consider seriously. Ever wondered what it would be like to retire early? Or be able to afford that fantastic trip or this great house you might see in magazines?
There is nothing scary about the stock markets. It should not be. It can be broken down into very understandable pieces. Even if you have a short term goal about money, that holiday around the corner that you have been dreaming about, you should consider investing. At the very least, not to lose money to that dreadful inflation. And at best, to build wealth in the long term, ideally through passive income.