This is the first of a five-part series that addresses investments, from why you need them to how you can make them work for you. In our savings-oriented economy, putting money away for a rainy day is a concept drilled into us from our earliest years. Perhaps that made sense when wealth was measured purely in terms of physical assets, but don’t you need your savings to keep pace with inflation? Wouldn’t you rather they helped you meet your life goals?
Here are 4 reasons why you should invest your money instead of just saving it:
Think about why you’re saving. Is it so you can retire early, in comfort and complete financial independence? Do you want to travel the world, set up a business or build your own home? Your dreams will never be more than dreams until you start working to make them a reality. Turn them into tangible goals by understanding where you want to be and how much it will cost to get there. Then, create a saving and investment strategy that will help you achieve each goal.
Time is your biggest ally in the pursuit of wealth, i.e. not just how much you save or invest, but how long you do it. The secret lies in the power of compounding interest and returns. Compounding can turn even small sums of money into comfortable nest eggs over the years, by adding each gain back into the original pot. This keeps growing and earning higher returns, which get reinvested in turn. Savings accounts also provide compound interest, but typically at much lower rates.
Why do most investments offer tax breaks? It’s because the government wants you to put more money into the financial market instead of just sitting on your savings. The more funds that individuals put into investment vehicles, the more financial support businesses receive, thus helping the economy grow at a faster rate. If an idealistic desire to help the nation’s economy isn’t reason enough to invest, potential tax savings could certainly take its place!
The idea behind ‘saving for a rainy day’ lies in creating a backup plan for financial emergencies. A savings bank account isn’t always helpful, especially if you’re prone to unplanned spending. By investing a little extra every month, you’re creating a safety net for the future while being free to do what you want with the rest of your money. Many investments offer ready liquidity, so you can access funds when needed. At the same time, you’re likely to think twice before cashing them in for frivolous expenses. Investing is nothing more than putting your money to good use, so it can grow at the same rate as (or faster than) your expenses. Of course, certain types of investments are volatile or risky, so do your homework before making any major decisions!
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