Why You Need to be Investing
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The classic American corporation involves a simple exchange with almost all its employees. You give up your time and perform a role, in exchange for compensation. The catch is that you only have so many hours to give. Once an hour is used you can never get it back. There are no returns or exchanges and we only get one go at this exact moment. After you have given all the hours you are willing to give, are you left with enough money to live and do the things you want to do? For the average American the answer is no. The average American lives paycheck to paycheck, opening and hitting their limit on multiple credit cards and living a life strapped with debt.
There are ways to slowly break out of this cycle though. If you have any social media whatsoever you'll see countless 'gurus' preaching get rich quick schemes and side hustles that require only a couple of hours of work each week and BAM, you are on your way to millionaire status. You can almost see yourself at a beach house sipping a mojito after listening to these people pitch their idea to you. This of course is not the reality for most people and is often not a realistic way to build tangible long term wealth. This post, and what I plan to be a series of articles for beginner investors is meant to outline a time tested method to growing your wealth, investing in the stock market. This article will outline three reasons why you should make the decision to start investing today.
Why Should you be Investing?
Reason #1 - To Beat Inflation: As per investopedia.com, inflation is defined as the decline of purchasing power of a given currency over time. In its most basic form, inflation is the ever increasing cost of goods and diminished value of a single dollar. Think of the cost of your grocery list going up every time you walk in the supermarket but your wage not following along.
Taking your income and stashing it away at a bank (or worse under your mattress) is a good way to guarantee that your hard earned dollars will be worth less in 10 years than they are today. The average inflation rate over the last several decades in the United States is about 2-3%. This by itself does not sound like the end of the world until you realize that this leads to prices doubling every 20 years or so.
Investing in the stock market (represented here by the S&P 500) from 1926 through 2021 returned, on average, approximately 10-11%. Taking the same 10-11% growth figure let's do some quick math and see what happens to a $10,000 investment over several time horizons
1. $10,000 invested at 10% over 5 years = $16,105
2. $10,000 invested at 10% over 10 years = $25,937
3. $10,000 invested at 10% over 20 years = $67,275
The two biggest components of these growth figures are the power of compound interest and the power of staying in the market for decades. Compound interest deserve's a single article in its own right. Think of it as the interest you receive on your interest. After the first year your investment portfolio returns you $1,000 (10% of the $10,000 we were previously working with) your next year, you are now operating with $11,000. Whatever growth is experienced in that year will only add to that. This snowballs into a large sum of money over a long period of time.
This brings us to the next point, staying in the market as opposed to trying to time the market. The longer you are in, through the good and the bad, the more likely you are to hit those historical returns previously mentioned. Some years you may experience a rate of return higher but you also may experience years where you lose money too. This isn't a reason to panic if you understand and are prepared to weather the storm. The investor who can do this over 10, 20, or 30 years is the most likely to reap the benefits. Patience and consistency for the average investor is king.
Not everyone will have $10,000 to begin their investment journey, but everyone has something that they can contribute to their financial future. It may mean making coffee at home, or skipping a couple dinners and drinks out on the town. These are small prices to pay to grow a sizable chunk of wealth to get you through retirement and potentially set your family up for generations to come.
Reason #2 - Your Employer May Help You Save for Retirement: For the initial knock I gave 9-5 jobs there is one benefit that you should be taking advantage of. That is a company sponsored retirement account, usually known as your 401(k). Within these plans you are able to take pre-tax dollars and invest in the market based on options your employer provides. The benefit here is two fold, you are able to reduce your taxable income for any given year and save for retirement in one go.
The real magic here is if your company provides a match to your contribution. For example, if you set your 401(k) to automatically take 5% of every paycheck and your company has a match of 3%, that additional percentage from your employer is free money. Now of course it is a match so to get a to the match you need to at least be contributing that much yourself. There are typically vesting periods that you will need to remain at the company to claim this match as your own. These are all things your HR team should be able to assist with.
BOOM – you now have money being invested for retirement and have your company also helping you out! Before you go crazy with your 401(k) there are a couple things to note. There are limits to how much you can invest through this account. Your investment is also pre-tax so it will be taxed on the way out when you withdraw money in retirement. This is a retirement account meaning there are penalties for withdrawing money prior to the retirement age. I strongly urge everyone to look at their individual plan for themselves though and fully understand the pros and cons before making any decisions.
Reason #3 - You Can Take Control of Your Time: The third and final piece I want to leave you with is this. By breaking out of the typical 9-5, making smart, consistent investments you can take back control over your time and how you spend it. Investing is a time tested method to grow a healthy nest egg that can allow you to leave that current job, or buy an investment property or simply live with the financial security that you can keep your family safe and fed no matter what life throws your way.
The reason I started investing is to start the process of wealth building so the future generations of my family never have to struggle for money again. Hearing stories of the struggles my immigrant grandparents had to go through served as motivation for this. Working long hours and hard manual labor jobs for small wages is something I never want my family to have to do again. I started investing in my early 20's and I am hoping that by the end of my life, I have started the process of keeping generations of my family financially secure. Not only that, but I hope to instill the wisdom into younger generations on how to grow wealth beyond their own 9-5 job. Everyone has to start somewhere. It can be a couple dollars, or a couple thousand dollars. The point is if you don't start somewhere you'll never get anywhere.
I'm excited to hear what you all think about this one, and how you started your investment journey!
