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Save more, spend smarter, and make your money go further
So far in our investing series, we’ve discussed the importance of investing and basic investing terms that you should know, but now we’ll be talking about the many benefits of investing. The purpose of this chapter is to provide you with a basic understanding of how investing can change your life and the key benefits to getting started with your own investments.
There are countless investment benefits which we’ll be exploring in further detail below. Investing can be a great way to generate passive income, which is essentially income that you make without working. So rather than getting a second job or working more hours, you could have the potential to significantly increase your income with investing without even leaving your house. This means you could add to your income from the comfort of your own home.
So if you haven’t already, consider incorporating an investment strategy into your financial plan so that you can more confidently achieve your long-term financial goals and prepare for the future. Investing can benefit your life now and in the future, so consider getting started today to see for yourself just how much investing could positively impact your financial and personal success.
Long-Term Returns
If you invest in the right places, there is a lot of potential for long-term returns. One of the main benefits of investing is that the money you invest has the potential to grow substantially over time. Rather than just putting your money into a savings account to save for the future, investing is can be a much smarter way to make your money work for you.
However, different types of investments can generate different levels of returns. This is known as the risk-return tradeoff. Risk is any uncertainty that your investments will produce a lower than expected return. Return is the money you earn on your investments.
Investing in preferred stocks, for instance, is generally considered a low-risk investment because it has more potential to produce steady returns. But investing in assets like cryptocurrency and blockchain companies are generally considered high-risk investments because there is a higher chance that you’ll lose money with the investments. But as long as you invest in the right places, there can be potential for long-term returns with your investments.
When building your investment portfolio, it’s important to know your risk tolerance so you can figure out which type of investments are best for you. As an investment beginner, many people stick with low-risk investments at first. You can always move into riskier investments as you become a more seasoned investor if you choose to.
Build Wealth
In addition to earning enough money to cover your basic needs and prioritizing money management, investing your money in a variety of assets can be a great way to potentially build your wealth. If you start investing now, just imagine how much money you could save up by the time you reach retirement. This is all due to the beauty of compound interest.
Compound interest is essentially the interest you earn on interest. As an example, say you invest $100 and it earns a fixed rate of 5% each year. This means that by the end of the first year, you’ll have $105. While that might not seem like that big of a deal, you have to look at the bigger picture. In 25 years that $100 will have turned into $340, without having to do anything at all. That’s the beauty of investing.
Keep in mind, though, that not every investment provides a steady interest rate year-over-year. While a high-yield savings account can earn you a steady but small amount of interest over time, the returns of stocks and other assets will fluctuate with the market.
Plan for Retirement (Or Early Retirement)
One of the best ways to invest in yourself and your future is to start a retirement fund. Whether you want to retire when you’re 70 or 50, it’s imperative to start saving for retirement as early on as possible and one way you can do that is by investing. Investing can help grow your savings, so you may be able to actually achieve those retirement dreams of spending your golden years on a tropical island somewhere.
There are several different types of retirement funds that you can invest in, such as a 401(k) or IRA. Both accounts have great tax benefits, but a 401(k) is more common because it’s an employer sponsored retirement fund and many employers also offer a 401(k) match.
A 401(k) match is when your employer matches a certain amount of your 401(k) contributions, which is basically free money. This is an easy way to grow your retirement savings without having to actually contribute any more of your net income towards your investments. However, there is a limit to how much you can contribute to your 401(k) account each year, which is something to be aware of. As you get older and make more money, it can be a good idea to contribute more money so that you’re closer to the 401(k) contribution limit.
Investing in these retirement accounts can also help you save on taxes. That’s because these are tax-deferred accounts, which means that the money you contribute is not taxed the year you earn it. You’ll pay taxes on the money only when it’s withdrawn from the account, which usually won’t happen until retirement.
Meet Personal and Financial Goals
Another important reason to invest is that it can help you achieve your personal and financial goals. It doesn’t matter if you want to accomplish these goals in the next few years, or in the next few decades, investing can be a great way to grow your money so you have the financial freedom to achieve them. Investing can help you meet important goals such as:
- A college fund for your children
- Buying a home
- Vacations and vacation homes
- Overall financial stability
- Big purchases
Since investing can help you achieve both long-term and short-term goals, it may be a good idea to consider keeping both low-risk and high-risk investments in your portfolio. Low-risk investments are typically better if you want to make returns quickly to accomplish a goal in a shorter time frame. However, in some cases high-risk investments can prove better for long-term goals, since there is more of an opportunity for larger gains.
Stay Ahead of Inflation
Investing also has the potential to allow you to stay ahead of inflation by growing your money. By investing your money, you may be giving yourself more buying power—that is, as long as your investments are beating the rate of inflation. The rate of inflation can vary each year, so it’s important to find investments that can generate enough return to outperform inflation.
As the cost of living increases each year and it becomes more difficult to afford basic expenses like gas and housing, investing can be a good way to combat this so you can continue to have enough money to cover your living expenses.
Multiple Streams of Income
The best part about investing is that you have the potential to make money without even leaving your home. With investing, you could generate multiple streams of income right from home. Just imagine how nice it would be to know you’re making money as you sit and watch TV on your couch.
Earning passive income is a smart move for everyone. But there are many ways you can consider investing to make passive income, so it’s important to choose one that you feel confident is right for you. Some ideas for passive income may include:
- Buying index funds
- Investing in high dividend stocks
- Exploring real estate investment opportunities
- Contributing to a high-yield savings account
Have Savings to Fall Back On
At the end of the day, everyone wants to have savings that they can fall back on. Things can happen unexpectedly. You can lose your job and have to move and all of a sudden are dealing with financial turmoil that you’ve never experienced. As stressful as this may be, having sufficient savings can help you navigate these unexpected life situations.
Whether you’re saving for emergencies, your child’s education, marriage, or just to accumulate wealth, investing can be an effective way to grow your money so you can be better prepared for whatever life throws your way.
In Conclusion
There are numerous reasons to invest. Investing can help you build your wealth so you can feel more financially secure. Investing can help you plan for retirement and achieve your personal and financial goals. Investing can be a great way to stay ahead of inflation and earn multiple streams of income. But overall, investing can be a way for you to earn substantial savings that you can fall back on. We all want to feel secure and comfortable when it comes to our finances, and investing could be how you achieve that.
So now that you’re more familiar with the benefits of investing and why it’s important to start investing as soon as possible, you can move on to the next chapter of our investing series, where we’ll cover how to create an investment plan that works for you.
This is for informational purposes only and should not be construed as legal, investment, credit repair, debt management, or tax advice. You should seek the assistance of a professional for tax and investment advice.
Third-party links are provided as a convenience and for informational purposes only. Intuit accepts no responsibility for the accuracy, legality, or content on these sites.
Save more, spend smarter, and make your money go further
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