Top 5 Reasons Why Investing Is Important
So you're wondering why is investing important.
You're probably in your mid to late twenties and want to know if investing money is important.
The short answer is yes, it is important!
Why Is Investing Important?
Investing is important because it can help you stay ahead of inflation, build wealth, pay less in taxes, make passive income throughout retirement, and reach other important financial goals.
As you can see, there are many reasons why investing is important. Now I'm going to explore them in greater depth.
1. You Stay Ahead of Inflation
I bet you weren't aware that your money is losing value every year due to something called inflation.
Inflation is the general increase in the price of goods and services in an economy that occurs every year, consequently reducing the purchasing power of your money.
The average inflation rate in the US over the past 130 years is about 3%.
The average return of the S&P 500 over the past 120 years is 10% annually, or about 7% after adjusting for inflation.
The average interest rate for a checking account is only 0.06% while, as we remember, your money will lose 3% of its value every year due to inflation!
So investing can help you grow your money and ultimately shield it from inflation.
High-Interest Savings Accounts
There are a few places to put your money if you don't feel that you have enough to start investing yet.
Experts suggest that you should save up 1-2 months of expenses in your checking account. After that, you should save up 2-4 months of expenses in a high-yield savings account like CIT Bank's Savings Builder Account.
You can begin looking at investing your money to stay ahead of inflation once you have enough money in these accounts.
2. Investing Will Help You Build Wealth
Investing is also important because it can allow you to easily build wealth over time as you make regular contributions from your salary.
In fact, the typical 25-year-old American can become a millionaire from nothing if they start investing $610/month or $7,320 a year from age 25 until 60.
Here is what your investment would look like.
Regularly investing money in an S&P 500 or Dow Jones index and holding it long-term is a proven way to build wealth.
If you want to learn how to invest your money, consider visiting my How to Invest $1000 article where I explore the best ways to invest your first $1000.
3. You Will Pay Less in Taxes
Another benefit of investing is saving money on taxes.
You can reduce your taxable income by contributing to your 401(k) or traditional IRA.
This allows you to invest money to build wealth while saving money on taxes. It's a win-win.
What's more, some employers will match your contributions up to a certain amount, so you basically get free money added towards your retirement fund.
On average, employers will match up to 4.3% of your salary in contributions.
For example, if you made $62,000/year, your employer would match your contributions up to $2,666.
So you would be effectively contributing $2,666, + $2,666 for free from your employer.
There are other retirement accounts as well that calculate tax differently.
You could contribute to a Roth IRA and pay the tax now to avoid paying taxes when you withdraw your money.
Contributing to a 401(k), however, is probably a better option if you want to have more money to spend now while still investing for your retirement.
4. Investing Will Get You to Retirement (Even Early Retirement)
Investing your money is a great way to generate passive income which will allow you to retire early.
The average dividend for S&P 500 companies over the last 140 years is 4.3% annually.
How Much Money Do I Need to Retire?
So, you'd need to have $1,450,000 invested in an S&P 500 index fund to make $62,350 a year (a typical household income in the US) without working.
This is only an average, I'm not saying that you need $1,450,000 to retire.
Certain sectors pay higher dividends (financial stocks come to mind) so you could retire with a smaller investment portfolio.
For example, you could make $63,250 a year from dividend income with a $1,150,000 portfolio earning 5.5% interest.
I'm not saying that you have to invest in stocks, but it is one of the most lucrative investment vehicles.
There are also people who retire on their rental property income, for example.
5. Investing Can Help You Reach Other Financial Goals
Investing can help you reach other financial goals faster.
Some common financial goals are:
- Paying off debt.
- Saving for retirement.
- Building an emergency fund.
- Buying a home.
- Saving for a vacation.
- Starting a business.
- Feeling financially secure.
Investing your money is a good idea if you don't plan to use the savings for at least 10 years.
The stock market and real estate markets are prone to short-term fluctuations.
You might find that your investments have fallen in value by 10-30% after one year, so don't invest if you want to spend the money soon!
Financial Goals that Investing Will Help You Reach Sooner
Some financial goals that investing can help you reach faster include saving for a vacation, saving for a home, and saving for retirement.
You're better off just putting your money in a high-interest savings account like CIT Bank's Savings Builder account if you want to spend the money within 10 years.
Conclusion on Why Investing Is Important
So, investing can help you stay ahead of inflation, build wealth, pay less in taxes, retire early, and help you reach other financial goals!
Now that you know why investing is important, you'll probably want to know how to invest your money.
I have a great article where I explore how the invest your first $1000 here.