Saving money is important, but it’s only a part of the story. As you grow older in life, your financial needs (and desires) also go up. You might want to buy a car, buy your own house, start a family, send your kids to school, retire from work, etc. All these things require a lot of money. Sure, you can save some money from your income to prepare for these things. But it will be hard to afford them just by saving alone. You will eventually realize, that having savings isn’t enough.
What is Investing?
Investing is a way to make your money work for you. There are two ways to make money in our modern world. The first way is to earn an income, either by working for yourself (i.e. as a business owner) or for someone else (i.e. as an employee). The other way is to invest your money into assets that either generate income or increase in value over time. Whether you invest in stocks, real estate, bonds, or a combination of all of the above, the objective is to generate money without doing any work.
What’s the difference between Saving and Investing?
Many people view saving and investing as the same thing, but they are not. While the two often go hand in hand, they also work quite differently. Saving is the part of your income that you set aside to spend at a future date. In effect, you are giving up some spending today for more spending in the future. Investing, on the other hand, refers to the part of your savings that you use to buy assets that earn money for you. These assets are commonly called “investments” and may include things like real estate property, shares (stocks) in a company, or even bonds. Investments generate income for you. You may receive dividends if you invest in shares or you may receive rental payments from a real estate property that you lease out. Your investment may also increase in value over time, allowing you to sell at a profit.
Savings is a sensible starting point in investing because it provides the funds you need to purchase a range of different assets and investments. However, investing goes one step further, helping you achieve your personal financial goals.
Why you should invest?
What if we just work harder to earn more and also save more? Why do we need to invest? Well, just like how you can earn more by working hard, you can also make your money do the hard work for you by investing. Here are the reasons why you should invest rather than just save:
1) Earn higher returns than savings account
In order to grow your money, you need to put it in a place where it can earn a higher rate of return. Most people choose to put their extra money in banks since they provide interest on the money that you deposit. However, most banks only give a measly amount of interest rate. For example, in the US, the average interest rate that banks put on savings accounts is just 0.13% per year. Compare that to most stocks that give out 3%-10% as dividends per year, you can see that the rate of return on investing your money is at least 20 times higher than just saving it. The higher the rate of return, the more money you will earn. This is why it is important to not just keep your money in a savings account but also to invest it so that it helps us earn more and create wealth over a long period.
2) Secondary source of income
Most of us have only one source of income which is our jobs. However, it is difficult to achieve various financial goals in life such as buying a car, a house, or comfortable retirement with just a single income. Investing can act as a secondary source of income. For example, investing your money in real estate properties such as land, condominium unit, apartment or even just a tiny room can provide you with an additional stream of income from rental payments of the property. If you don’t have enough money to invest in real estate in the first place, you can invest in stocks since majority of stocks also pays out dividends to the stockholder.
3) Grow your money through the power of compounding
Compounding occurs when an investment generates earnings or dividends which are then reinvested. These earnings or dividends then generate their own earnings. So, in other words, compounding is when your investments generate earnings from previous earnings. Compounding is a powerful force as it becomes a snowball the longer you keep your money invested. Even Einstein acknowledge compounding as the “Eight Wonder of the World”. For example, $100,000 invested for 10 years at an annual rate of 10% gives only $200,000 at the end of the 10-year period. But if we reinvested the earnings that we get each year, that amount could have been $259,374. A difference of almost $60k just by reinvesting the earnings and letting it compound. Now, what if the duration was 20 years? Not reinvesting the earnings back would only give us $300,000 while reinvesting the earnings and letting them compound give us $672,749. A huge difference. This is the power of compounding, the earlier you start and the longer you let your investments compound, the higher your returns will be.
Conclusion:
Saving money is important, but it’s only a part of the story. As you grow older in life, your financial needs (and desires) also go up. Many people think of saving and investing as the same thing, but they are not. While the two often go hand in hand, they also work quite differently. Saving is a sensible starting point in investing because it provides the funds you need to purchase a range of different assets and investments. However, investing goes one step further, helping you achieve your personal financial goals.
Make your money work hard for you by investing it. The most common investments out there are stocks, bonds, real estate properties, and mutual funds. Take advantage of the power of compounding by investing early and reinvest the earnings back.