Although there are different investment vehicles and other investments you can invest in, this site (and post) is purely about long-term stock investing.
Whether, depending on your risk tolerance, you invest individual stocks, mutual funds or exchange traded funds, it’s important you start investing early.
So, if you’re wondering why is investing important, here are the 7 biggest reasons why!
Creating Wealth Through Compound Interest
Investing in stocks is the most efficient way to get compound interest, or in other words, to get your profits to generate additional profits.
It’s compounding that makes stock investing such a powerful tool for wealth creation.
While you could theoretically put all your savings in your savings account, as so many people do, it’s not an effective way to create wealth.
The usual interest rate is nowhere near the same as the average return in the stock market (around 7-10%, depending on how you calculate).
So, if you wish to get wealthy by merely saving, you need a high income and a very modest lifestyle.
For most of us, that’s not the case. A typical situation is where an individual enjoys a decent wage and has some responsibilities, like a family and a mortgage.
What it means is that even if you were a master of budgeting, you couldn’t save enough money to bring you real wealth.
Investing your money, on the other, very likely can.
Retire Comfortably
I am a firm believer in taking responsibility for your own retirement.
The thing is that in the end, if you don’t have sufficient retirement funds, you’re essentially putting your life in the hands of others.
Without any pension plans, savings, a well-built retirement account, or investments, you’re basically in the hands of social security.
So, if the government decides to cut your pension, too bad. There’s nothing you can do about it. That’s the number one reason why it’s important to take responsibility for your retirement.
Another thing is that if you don’t have savings for your retirement years, you need to spend less and lower your quality of life as your income drops.
I don’t know about you, but I wouldn’t want to spend my last years on this Earth in miserable conditions.
Also, one of the biggest reasons why it’s not wise to keep your retirement savings in your bank account is inflation.
Beat Inflation
Inflation is the thing that makes everything more expensive while it erodes your savings and the purchasing power of your salary.
To beat inflation, you need to invest in something that offers a return higher than the inflation rate.
Historically, of all different investment choices, stocks have proven to be the best hedge again inflation.
Of course, inflation is not all bad.
Moderate inflation is necessary for the economy to work properly. Theoretically, it increases production by creating more demand. The optimal inflation rate is around 2-3%.
If the rate of inflation rises too high, it causes uncertainty in the economy and affects the economy in various ways.
Occasionally, inflation tends to run amok for a time, which is why it’s important to invest your capital to protect it against inflation.
Financial Independence
For many investors, achieving financial independence is the most important of all financial goals.
The idea of financial independence for me is that your investments generate enough profit per year for you to maintain your lifestyle.
If you want to work, your wage is a nice bonus, but you don’t need to rely on it.
In other words, your investments need to make a profit. The reason why achieving financial independence through merely saving in your bank account is the fact that the interest isn’t usually high enough.
Especially if you don’t have millions to begin with (as most of us do not), you’re going to need a higher return to build wealth.
Investing is important because it offers you the profits needed to achieve financial independence.
Passive Income
If there is one thing everyone agrees on, it’s that having a passive income stream is a good thing.
The beauty of passive income is that it doesn’t require constant effort to keep it up. In other words, your reward isn’t tied to your effort.
Let’s put it this way:
If you buy a stable dividend stock, your input is basically the effort needed to buy the stock. After that, the company keeps paying you dividends year after year, while you don’t have to do anything.
It’s a crude example, of course, but the idea is sound.
There are a lot of different ways to get passive income, but investing is the most common and easiest to achieve a long-term passive income stream.
Investing is Essential for the Economy
A stock market is a place where companies can raise the capital to grow their businesses even further and give the investor a chance to make a profit in the process.
When companies use the invested money to expand, they also benefit the economy.
Let’s imagine a situation where no one in the world would invest. This would mean that the only way a company could raise extra capital is through debt.
Now, the problem with debt would be that new companies tend to take a while before they start to make a steady profit.
Depending on the interest rate level, the debt payments can put the company out of business before it even had a chance.
Then again, if the company raises capital by issuing stocks, it has more time to use the raised capital to grow its business.
So, overall, investing has a tremendous impact on our economy.
It’s Extremely Satisfying
The main reason why I invest besides the obvious is that it’s an absolute delight.
I can’t even begin to tell you how enjoyable it is to analyze different companies and investment possibilities, watch your portfolio grow, and have the satisfaction of being right about an investment.
Or waiting for quarterly and annual reports, reading through them, seeing how the company has done, and waiting for the market reaction.
Besides creating wealth, I can safely say that investing has enriched my life in more ways than I would’ve ever thought possible.
It’s one of those rare things that, at the same time, is a lot of fun and good for you.
