5 Reasons you should Invest Your Money Instead of Saving
Saving vs Investing has been the age-old question for people of all age groups looking for financial security and financial future. Some advocate for one versus another, but, should you save all of the money that is left after spending? Personal finance experts like Dave Ramsey, a NYT best selling author and host of the popular financial program The Ramsey Show think the answer is NO. Although saving is one of the best things you can do to your earnings, saving alone won’t significantly improve your financial future. That’s why it is suggested that you take control of your money, and start investing in assets from a young age. Here are five compelling reasons why investing your money is a wiser choice rather than merely saving it.
1. Inflation Will Eat Away Your Wealth
A dozen of eggs cost $1.48 in 2019, but in 2023 you would have needed to spare $2.51 for the same dozen of eggs. Examples like this display that inflation is a perpetual phenomenon, whether the price increase is less or more. But when you save money in a traditional savings account, the interest earned is often lower than the inflation rate, causing your real wealth to diminish gradually.
Imagine you saved $10,000 in a savings account earning 1% annual interest. With an average inflation rate of 3%, your money’s purchasing power decreases by 2% each year. After 10 years, your $10,000 would effectively be worth only about $8,100 in today’s dollars.
But at the same time, if you had invested that $10,000 in an S&P 500 index fund, your investment would grow to approximately $19,671 over the same period, outpacing inflation and increasing your real wealth.
2. Money Should Work for You
Investing in diverse assets like stocks, real estate, crypto, bonds, etc. allows your money to generate returns, creating a passive income stream and potentially growing your wealth significantly over time.
One of the most famous sayings in personal finance is that your money should work for you, not the other way around. This clearly means that your assets and capital should work in favor of you, rather than you spending most of your lifes running for them.
Let’s say if you had invested $5,000 in Apple stock in 2010. By 2020, that investment would have grown to approximately $150,000, illustrating how strategic investing can significantly enhance your financial position without additional effort.
3. Stocks Have Outperformed Savings by a Big Margin
Historically, investing in stocks has outperformed other asset classes such as bonds and savings accounts over the long term. Investing in equities provides an opportunity to ride and enjoy the growth of your favorite company and also the economy as a whole.
An investment of $1,000 in the S&P 500 in 1980 would be worth over $60,000 today, which is more than six times, which is 9-10% annual growth.. This far outpaces the returns from traditional savings accounts or bonds over the same period, where the average savings account yielded only 1% annually.
4. Compounding is the 8th Wonder of the World
Albert Einstein once famously called compound interest the “eighth wonder of the world.” Compounding or compound interest is the process where the earnings on your investments generate their own earnings and returns. Although its effects may seem miniscule during the early year, compounding creates exponential growth in your wealth accumulation strategy.
If you invest $1,000 at an annual return of 8%, in 40 years, your investment would grow to $21,724. If you add $1,000 annually, your investment would balloon to nearly $300,000 due to the power of compounding.
5. Stable and Low-Risk Wealth Due to Diversification
There is a saying that you need to take on high risk to earn high returns. Although it is true on many occasions, it doesn’t have to be if you invest your money wisely in different income streams and asset classes. Diversification means exactly that, i.e.by spreading your investment and money among different assets to reduce risk. This allows you to not put all your eggs in one basket, reducing risk of failure(losing money).
For instance, during the 2008 financial crisis, while the S&P 500 lost about 37%, a diversified portfolio containing bonds, international stocks, and real estate might have only lost around 20%, highlighting the protective benefits of diversification even in the worst economic and market crisis of the last 80 + years .
By simply investing in mutual funds, real estate trusts or real estate, bonds, or other easily available instruments, any person can significantly enhance their financial future by combating inflation, utilizing the power of compound interest, and enjoy financial safety through diversification.