Once you are ready to start investing, the next and certainly most exciting step is to START investing!
Find out whether you are ready to start investing here.
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This article discusses five reasons to motivate you to begin your investing journey as soon as possible:
- The magic of compound interest
- The unforgiving inflation factor
- Preparation for retirement
- Develop better spending habits
- You can start with a small amount
1. Start Investing to Take advantage of the Magic of Compound Interest
Compound interest is simply the interest earned on interest. When you invest your money (the principal amount) it earns a return in each period. If the return earned is re-invested, it earns interest as well.
So then, both your principal amount and your returns are all earning more money for you!
Are you wondering how this simple concept can be so magical? It was even referred to as a world wonder by a notable person in history!
Here is an illustration.
Let us say that you invest $1,000 today in an investment with a 10% rate of annual return. Assuming that you re-invest all the annual returns, your investment will be worth about $2,500 in ten years.
With very little effort on your part (and no additional investment) your investment more than doubles! Need a little more convincing?
Okay, now let us say you continue to add $100 every month to your investment. In ten years, the investment will now be worth about $22,500. Isn’t that quite remarkable?
The power of compound interest truly lies in two important factors: the reinvestment of earnings and time. Patience is the key virtue here and all the more reason to start investing as soon as you can.
“Compound interest is the 8th wonder of the world. He who understands it earns it; he who doesn’t pays it.” – Albert Einstein
2. The Unforgiving Inflation Factor
Inflation is the gradual increase in prices over time. You and I have experienced the effects of inflation on everyday consumer goods such as food items at the grocery stores, clothing, furniture, etc.
To truly appreciate inflation, ask your parents or grandparents how much a loaf of bread cost when they were your age. Most certainly, a lot less than today.
The true effect of inflation on money is the loss of its purchasing power. A dollar today is worth much less in the future. If you save your money in a low-interest savings account (earning less than the rate of inflation), your purchasing power keeps on decreasing as money loses value over time.
With an inflation rate of 2%, $1,000 today is truly only worth $980 in a year. Just really think about that!
To beat the effect of inflation on the purchasing power of your savings, you need to earn at least the same rate of inflation if not more.
Check out these related articles:
- How to Invest: Stock Market for Beginners
- What Style of Investing is Best for you?
- Budgeting for Beginners + Free Budgeting Template
3. Start Investing in Preparation for Retirement
No matter what you age is today, it is never too early nor too late to start planning for your financial future. The prudent will say it is always better to be over-prepared than under-prepared.
Starting to invest for retirement as soon as possible will increase your likelihood of reaching financial stability at a younger age. In addition to comfortably supporting yourself in retirement, this could also mean being able to free up your time to pursue your passions sooner.
Additionally, if retirement is still far off, you have the time to take more (calculated) investment risk for a more handsome return. Usually with time, financial commitments such as supporting a family tend to increase and the less risk you can comfortably assume. Less risk means lower returns and a longer time to achieve financial stability.
If you are younger in age and have few financial commitments, you should definitely consider investing as soon as possible to take all the advantages of a longer investment period. If you already have other financial commitments, there are many wonderful investments options for you that will help you to become financially independent sooner as well!
The take away here is that starting to invest today is a great way to prepare for retirement and for your financial freedom.
4. Better spending Habits
Investing puts you in a frame of mind that makes you more conscious about your spending habits. When you have a solid financial goal (such as to have X amount of money to retire by age Y) you’ll definitely think twice before making any impulsive purchases.
Also, once you discover the power of compounding and how it can grow your nest egg exponentially, the more you’ll want to spend your money wisely and save more.
And how exciting it is to watch your money working for you. It makes forfeiting immediate gratification for a more meaningful future reward so much easier.
5. You can start with a small amount
You do not need to have a lot of money to start investing. Long gone are the days when investing was only reserved for institutional investors with deep pockets.
Technology has simplified investing so much that you can start with only a small amount and a good Wi-Fi connection! It has really become that simple.
Brokerage firm such as Fidelity offer fractional shares. A fractional share is a piece of a stock that is less than one whole share. And as such, you can afford stocks that would have otherwise have been out of reach.
Stay tuned for the world of easy investment tools and means that are available at your fingertips, literally!
Finally, if you have enjoyed reading this article on the reasons you should start investing or have any questions, please leave them in the comment section below. I would love to hear from you!
“The best preparation for tomorrow is doing your best today” ~ H. Jackson Brown, Jr