Why Start Investing- Moneyworks from Investors Business Daily (2024)

Investing can give you financial freedom.

Investing can have a big positive impact on your quality of life.

When you invest, you buy things like stocks, bonds and real estate with the expectation that when you sell them, you’ll have more money.

Investing is a way to put your money to work for you, even while you’re off doing something else.

Invest early and reap the rewards.

The key to building financial strength through investing is to start as early as possible and stick with it. Another important factor is choosing investments that fit your needs.

Think about your big picture goals: Maybe you want to start your own business, travel the world or retire early. Investing early can help you achieve those goals!

Financial independence means living your best life.

Investing can bring many benefits. First, it can help ensure that you don’t run out of money, particularly in your retirement years after you stop receiving income from your job.

Many studies conclude that Social Security retirement benefits won’t be enough to maintain a person’s standard of living in retirement. A separate retirement account can make up most—if not all—of any shortfall.

Investing can help you amass enough wealth to enable you to live off the money in your accounts. Think of it. No more job, unless you want it. No more wondering if you’ll have enough money to pay your bills at the end of the month.

The Elements of Investing

The miracle of compounding interest

The beauty of investing is that even a small account can grow to a large pile of cash in time to make a big difference in how you live your life.

That’s because of the miracle of compounding interest. It’s simple but powerful: With 10% interest, $100 grows to $110 the first year. In the second year, assuming you don’t take money from your account and you continue to earn 10% interest, that $110 grows to $121.

Each year you earn interest on the new, usually higher balance. Since most years the stock market goes up, that means you’ll be earning interest on a higher balance. In the table below you can see that if you start with $100, after 10 years earning an average annual 10%, your account will grow to $259—more than doubling. Start with $10,000 and you’d end with $25,937.

How much would you have if you start investing early?

Look at what would have happened if you had invested $10,000 in the S&P 500 stock market index five, 10 or 20 years ago.

When you’ve got time on your side, you don’t need to start with a lot.

• Inflation is a general rise in prices and a drop in the purchasing power of money.

• For example, say the $100 you have in your bank account today can buy 20 cups of coffee. But next year $100 might be able to buy only 19 cups of coffee. That’s the effect inflation has on the prices of things you buy. The purchasing power of your money has dropped.

• Inflation is common, with rates varying over time. But a lifetime of even a little inflation can take big chunks of value out of your money.

• In the past 10 years, the S&P 500 stock index, which represents big, high-quality companies, rose at an average annual rate of 13.88%. At that rate, an investment of $10,000 would have grown to $36,683.82. But adjusted for inflation, the purchasing power would be just $30,947.74.

• Inflation is an even bigger drag on investments that earn a lower rate of return. Like most types of bonds over the long haul, long-term government bonds produced lower returns than stocks in the past 10 years. They grew at an average annual rate of 7.16% -- nearly half the rate of stocks. A $10,000 investment would have grown to $19,967.65. Inflation would have cut the purchasing power to just $16,936.28.

• The best way to offset the effects of inflation is to invest in assets that have a higher return than inflation.

Learn more about the inflation rate and its impact on the U.S. economy.

Saving

Savings go into bank accounts, CDs and money markets where you don’t earn a lot but there’s little chance the value of your account will fluctuate much.

Savings are for rainy days, emergency spending and money you’ll need in the next one to five years.

You need to count on it being there in the near future.

Learn more about savings accounts in the personal finance lesson pages.

Investing

Investments should be made with money you don’t plan to spend for five or more years.

Ideally, that money should go into the stock market and other areas where you can earn a higher rate of return.

While the stock market has historically fluctuated more than savings in the near-term, it has provided significantly higher returns than savings in the long run.

Don't invest too little

More on Intro to Investing