Top 10 Reasons to Invest
Earning an income through investment may seem like a financial dream, out of most people’s grasp, or a process too risky to consider.
However, making a well-informed, suitable investment can mean the difference between complete reliance on your pension to support your future or financial independence and the ability to retire early.
Investing is the process of generating income, and possibly increasing the value of held assets, over a period of time.
It involves an initial outlay, generally financial, with the goal to earn extra income.
When the word ‘investment’ is mentioned, you may think of stocks and shares, but an investment can equally be property, bonds or even your business.
The key factor is the intention to hold your investment over a period of time during which the invested finances cannot be used elsewhere.
While putting money away in a savings account may carry less risk and effort, it is always reliant on the whims of the Federal Reserve and its Federal Open Market Committee (FOMC) who decide the interest rates.
A low-interest rate on your savings may well see the true value of your savings depreciate when faced with a higher percentage inflation rate.
What about the short-term targeting of volatile investment markets in pursuit of high profits?
This is often bundled up with the term ‘investment’ but is actually a different strategy called ‘speculation’.
While speculation follows the same markets and vehicles as investment, it is an altogether riskier process.
Investment, by comparison, absorbs the level of risk through its longer-term strategy.
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How to Know You’re Ready to Invest
If you have been thinking about making an investment but you’re still unsure whether to commit, follow our checklist below to help you decide:
You Know Your Goals
Investment should not be entered into with a vague idea of making a profit. Your goals will always determine the different factors involved in making your investment:
- Your investment vehicle; for example, shares , property , bonds or foreign currency
- The length of your investment
- How much you invest
- Whether you diversify your portfolio; for example, buying both shares and bonds
What are your goals?
- Do you want to buy a new car two years from now?
- Are you saving towards your children’s education?
- Do you want a guaranteed income during your retirement?
If we look at the last goal – an income during retirement – investing in shares that pay dividends would be ideal because as long as that company remains standing, you will know how much dividend income to expect each year.
Equally, if you know that the new Tesla model you are interested in acquiring will be released in two years’ time, the asset you invest in must be sufficiently liquid and likely to rise in value that you will be able to sell it in time and for the target amount of the car, or more.
You Have Savings
Investing carries the risk that you may lose money, especially over shorter periods of investment, so it is imperative that whatever funds you invest you can afford to lose.
Ideally, you have savings that are not intended for a specific purpose, or you have money left over every month once you have paid your bills and other essential outgoings.
It is also recommended you have some level of financial buffer so that should you lose your job, you can continue to pay your bills for the next three to six months while you look for fresh employment.
This buffer may also come into play should a large, unexpected expense occur, such as the need to replace your car after an accident.
If you have savings or spare money after paying your monthly bills, and a financial buffer in place, investment may be the right path to take to build your wealth.
You Don’t Have Debt
Most people will have a mortgage. Many people will take out some form of loan to purchase a car. The most prevalent form of debt in the US, however, is credit card debt .
The interest charged on your debts will generally be higher than the amount you can earn through investment but because certain debts, such as a mortgage and student loan, are tax-deductible, it is worth examining the situation in detail.
Before you consider investing your money instead of paying off debt, calculate:
- What your debt costs you after tax
- What your after-tax earnings are, or are likely to be, from investment
- Which is the greater
Investment is rarely the answer to huge debt problems. If in doubt, pay off your debts first.
You Have a Responsible Attitude to Growing Your Wealth
Investment is a long-term process that requires careful planning and monitoring.
It should be guided by:
- Your investment goals
- Your financial situation
- Safeguarding the present as well as the future
Rather than a way to earn a quick buck, or a quick thousand bucks, investment should be seen as a method to grow your wealth over time.
If you are worried that you don’t have sufficient money to invest, you may find Stocks vs. CFDs: The Key Differences an interesting read.
You Have the Motivation to Learn
If you want to make a success of your investments, you will be expected to learn about the industry. It is not enough to invest and then leave that investment to roll.
Even with the help of a financial adviser or broker, you must be able to react to movements in the market and adjust your investments to suit your changing needs.
Investors who continually learn about the subject generally do better than those who merely dabble.
Investment is a complicated industry but to improve your chances of making a success of the process, you must be prepared to learn and continue to learn for as long as you invest.
Top 10 Reasons to Invest
If you have been through our checklist and think you could be ready to invest but still have doubts, we may be able to help with our top 10 reasons to invest.
1. Protect Your Purchasing Power
One of the benefits of investing over leaving your money in a savings account is the opportunity to protect your purchasing power against inflation.
A country’s inflation rate is an indication of the health of its economy and how much prices have increased.
Since 2016, the year-on-year US inflation rate has varied as follows:
- 2.1% in both 2016 and 2017
- 1.9% in 2018
- 2.3% in 2019
- 1.4% in 2020
- a predicted rate of 1.4 to 1.8% in 2021
From a consumer’s point of view, this means that the cost of living and price of goods, such as food and clothes, increase in alignment with the inflation rate.
You will be able to buy less with $100 in 2021 than you could 10 years ago.
If the inflation rate is 2%, your savings account interest rate must match that to maintain the ‘value’ of your savings.
If the interest rate is lower than the inflation rate, then your savings will begin to lose value. Your saved $2,000 will buy you less than it did the year before, and before that.
By investing in a diverse portfolio of assets that out-perform levels of inflation, you can protect your purchasing power.
2. Grow Your Capital
At its most basic definition, your capital is the amount of wealth you possess.
Generally, capital will include the funds you have access to, such as the money in your bank account, and liquid assets – assets that can be easily sold and turned into cash.
Many of your investments (for instance, shares) will be deemed liquid assets because they can be sold within a reasonably short amount of time.
There are also capital assets, such as property, but these are separate from your capital due to their lower liquidity.
Investment increases your capital by:
- Adding to your liquid assets
- With careful handling, increasing the value of your liquid assets
- Increasing your funds should you sell investments at a profit
- Adding to your funds in the case of assets that pay dividends
3. Achieve Your Financial Goals
Your financial goals might include buying your forever home, moving to an electric car instead of a petrol or diesel vehicle, setting up a college fund for your children, or arranging a reliable income for your retirement separate from your pension.
Investing can help you achieve bigger financial goals than you could otherwise afford, or it can help you to achieve those goals more quickly.
4. Earn More Than From a Savings Account
Putting money away in a savings account may seem like the obvious way to safeguard your financial future. However, the performance of your savings is always reliant on how well the account’s interest rate compares with inflation.
Investing that money instead offers you the opportunity to not only beat inflation but also provide a greater percentage return than you would receive from a savings account.
It offers you the chance to take control of your finances rather than rely on the decisions of the Federal Reserve and FOMC.
5. Diversify Your Income
Investment allows you to create multiple streams of income.
For instance, you might earn money from:
- Your regular job
- Selling homemade jewelry or crafts on Etsy or eBay
- Investing in shares that not only increase in value but also pay regular dividends
The benefit of multiple streams of income is the buffer they provide should one source of income stop.
If you lose your regular job, your investments may well provide a financial bolster until you can find new employment.
6. Save for Retirement
Increasingly, people are discovering that their retirement pension will not be sufficient to maintain their current lifestyle.
Their choice is then either to return to work or become accustomed to a lower quality of life.
Investing allows you to increase your capital while you are working to build a portfolio that will support you in later life.
There are various types of investments that are more suited to planning for retirement.
For instance, the purchase of dividend shares will provide a regular dividend income, an amount that you can reinvest before you retire and rely on as an additional income after you retire.
The earlier you begin to save for your retirement through investments, the more compounded the effect will be, and the more your retirement pot will grow.
7. Lower Taxable Income
We all have to pay the taxman, but did you know that by investing your money, you can reduce your tax liability?
Investing pre-tax money in an employer retirement fund, such as the 401(k), or an individual retirement account, will allow you to both build your pension and reduce your taxable income.
8. Help Others Achieve Their Goals
The main way that you can help others to achieve their goals is to invest in companies and brands that appeal to you.
Your interest may go further than a specific company, extending to the industry it is involved in, such as farming or computing.
On a more personal level, you can use your investment income to build a college fund for your children or your grandchildren, help your wider family, or leave a financial legacy after your death.
9. Support Causes That Are Meaningful to You
If you are interested in a cause, such as green energy or ending poverty, you can support it by investing in related companies and brands that are making a positive difference.
Many shares come with voting rights too, so beyond your financial investment, you can play a part in shaping the direction of that company.
10. Gain Knowledge and Stimulate Your Mind
If you want to succeed at investing, you have a lot to learn, and the learning process is continual.
The markets are various and fast-moving. There are many types of investment. Market conditions change on an hourly, daily and yearly basis. The related legislation is updated regularly.
On top of all of that, real-world current events trigger more changes, whether those events are a pandemic, a financial crisis or a war.
Investing is a venture suitable for minds that are enthusiastic to learn and that seek stimulation.
Interested but want to learn more before you invest? Read The Best Stock Trading Courses for more information.
Investment can seem a risky process until you realize that it is all about taking control of your money, now and in the future.
It requires foresight, learning, patience and a responsible approach but if done successfully, it can put you in the driving seat, ready to choose your own direction.
WikiJob does not provide tax, investment, or financial services and advice. The information is being presented without consideration of the investment objectives, risk tolerance, or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk including the possible loss of principal.