Is investing worth it? Benefits of investing
The tension in the air is growing stronger. The word “investing” reaches your ears more frequently with each passing day. It starts to haunt you in targeted ads, small talk, movies, and social media.
But what is it about investing that prompts people to discuss it? What is it about investing that triggers the fear of missing out and the urge to try it, or at least, attempt to comprehend it? And what is it about investing that could offer you benefits?
Many things, but we’ll simplify it. Here are the three main benefits of investing that everyone needs.
The investing cycle
There are three stages in the investing cycle:
- Save your money
- Grow your money
- Live your dream
Those are also the main benefits of investing.
This is what investing helps you pursue. A bit broad, right? Agreed, agreed. So, let’s delve deeper into each of these points to understand what I mean by them.
1. Save your money
Saving a portion of your income regularly is one thing. Understanding what happens to it while it rests in your bank account is another.
Inflation. No, INFLATION! (Read in a devilish voice, followed by an evil laugh.)
"Back in my day, things were much cheaper!"
That’s what your grandparents said, what your parents say, what you and your kids (if you plan to have any, no pressure) will say. And the reason for that is inflation.
It simply means that over time, you can buy less with the same amount of money than you could before.
€1000 ten years ago could buy you an iPhone, headphones, an iPod, and leave you with some money for other expenses. Now, you can only buy an iPhone. And not even the best one.
Yes, technology has changed, but you get the main idea. €1000 ten years ago could buy you more than it can now. This principle applies to all times.
What can we do about it?
First of all, understanding the problem is halfway to dealing with it. So congratulations! You're almost there :)
Secondly, remember that when you're saving up money, you are not safeguarding it from inflation. Money that you simply keep under the mattress or in a less obvious place at home, or in your bank account, loses its purchasing power every month.
Thirdly, invest!
Investing saves your money from inflation
Let's compare the inflation rate with the returns of the most famous investing tool for long-term investors — the S&P 500.
2.16% is the average annual inflation rate in Europe from 1991 until 2023.
10.14% is the S&P 500's average annual return from 1991 until 2023.
As you can see, investing not only protects your money from inflation but also makes it grow. And here comes the second benefit.
2. Grow your money
You work hard to earn that money. So why not make the money… work for you?
In investing, it works just like that: once you've understood how things work and start to invest regularly, you don't have to wait long until your investments begin to generate a stable income. Moreover, the longer the period you invest for, the more income you'll receive. This is called “compound interest”.
What's compound interest?
Compound interest is when you're not only earning interest on the money you've invested but also on the interest itself. This creates a snowball effect that accelerates your money's growth over time.
Let's say you invest $1,000 with an annual interest rate of 10.14% (same as for the S&P 500). In the first year, you'd earn $101.40 in interest, making your total $1,101.40. Now, in the second year, you're not just earning 10.14% on your initial $1,000, but on the new total of $1,101.40. This gives you $111.88 in interest, and your total becomes $1,213.28.
As time goes on, this cycle continues. Your money doesn't just grow in a linear fashion; it accelerates. The more years you allow this to happen, the more your money multiplies because you're earning interest on both your initial investment and the interest it previously earned.
What will happen to the $1,000 in your investing account if you forget about it for 10 years?
You will have $2,602.25.
In 20 years?
$6,727.50 in your account.
That’s the compound interest magic.
And once you've established your investing habits, defined your goals, and formulated your strategy, there's one thing left.
3. Live your dream
After you've saved your money from inflation and grown it, it's time for the next and final step.
Live your dream — whatever that dream might be.
Being financially independent?
Having a secure retirement?
Buying a house or a car?
Saving for a vacation?
Saving for your child’s education?
Traveling?
Whatever your goal is, whatever your dream is — you can achieve it with the help of investing. You just need to align your investing strategy with your goal, stick to it, and reap the benefits.
What's next?
Repeat! Investing is an ongoing action, so you need to consistently dedicate your time and money to make your money work for you. No, you don't have to commit to it full-time. For long-term investors, several hours a month will be sufficient.
If you're unsure about where to begin, we recommend going through the Bakksy free educational course. This course will provide you with a deeper understanding of all the fundamental investing concepts in simple language, without intricate investing jargon. Plus, you might even receive a free stock at the end ;)
So is investing worth it?
100% YES.
That’s it. Have nothing to add here. Hope you’ve made your conclusions ;)
