Making money simply for money’s sake is a pretty empty endeavor. Money is only a medium of exchange after all and becoming obsessed with it can change a person. Some buy fancy clothes, expensive cars and vacation properties they’ll seldom ever enjoy. Others simply reinvest all their proceeds because they feel guilty spending. Perhaps they are petrified of running out of money in retirement because the government is a terrible role model when it comes to budgeting and social security. Neither extreme on the spectrum is very healthy over the long run. But, overlooking the importance of taking the time to invest your savings could really wreck your future.
Why risk ruining your future if you have the ability to protect it now? Our country is in a retirement crisis and people are not saving enough money. Those who do save typically aren’t saving enough and feel too intimidated to invest their savings in the markets.
What I’ve learned over the years is there’s a beauty in finding a healthy balance of saving, investing and spending. I’ve gone through phases when I overspent beyond my monthly income at one end of the spectrum, to being a super saver who ate PBJ and 10 cent ramen in order to put as much cash as possible in my bank account – but I was too lazy and foolish to regularly invest the cash I saved. Now, I’ve found a happy medium. I still regularly save every month, spend well within my means (mostly on travel and healthy food), and most importantly – invest. Let’s discuss five reasons why investing is good for everyone.
The Main Reasons To Invest Your Money
1) To fight inflation. Like it or not, inflation is one of the biggest killers of wealth. Gas used to cost $1 a gallon back in 1995, and $0.35 a gallon back in 1962. Tuition at the University of Pennsylvania costs $42,000 for 2015, but used to cost only $1,250 in 1960. I sound like my dad when I say these things, but they’re true.
Being a millionaire today is nice, but it isn’t what it used to be. I agree with Sam that 3 million is the new 1 million. Given money markets only average 0.2% and the best 5-year CDs are under 2.5%, investing in the stock market in a diversified manner helps fight inflation. The average annual return of the S&P 500 is around 6-8% per year. Don’t lose money by holding too much cash – invest your savings!
2) To protect yourself from yourself. Few people can resist not eating a warm chocolate chip cookie sitting right in front of them. It’s also equally hard not to spend your money if it’s just parked in an easy-to-access checking or savings account. If you don’t have the slightest worry that withdrawing cash from an ATM could put your account overdraft, you’re likely to take out more cash than you need and spend it.
Protect yourself from the temptation of unnecessary spending by investing your savings each month. An unintimidating and fun way to put your cash to work is by investing in themes and ideas that interest you through Motif Investing. Accounts are free and their super low-cost commission saves a lot of money in the long run. I love the products in their catalog because they’ve already done all the legwork picking the best stocks for each thematic basket. By investing your savings in various motifs, you curb your temptation to spend on frivolous things that mostly depreciate over time.
3) To hedge against the unknown. It’s a bit hard to believe that the 2008-2009 financial crisis seems like a distant memory. The national unemployment rate is under 6% and there are much fewer stories of layoffs or friends who are long-term unemployed. But before the 2008-2009 financial crisis, we can’t forget there was the dotcom bubble in 2000. And before the dotcom implosion, there was the Russian Ruble and Asian Financial Crisis in 1998 and 1997.
If there’s one certainty in investing, it’s that corrections do happen, and often times unexpectedly. It’s good to invest during boom times to earn money, but also hedge during times of irrational exuberance. Check your emotions at the door too and avoid panic selling. Diversify!
4) To challenge yourself. It’s easy to think it’s effortless to pick stocks like Warren Buffet during a bull market. I wish you good luck trying to beat his track record! But the good news is you don’t need a lifelong career in finance to become an investor. It just takes determination and execution.
Innovation has allowed companies like Motif Investing to allow everyday individuals act like their own fund managers through their “basket” of stocks business model. You can challenge yourself by customizing your own grouping of up to 30 stocks and earning commissions when other users trade your custom motif if you choose to publicize it. If you prefer to leave the stock picking to the experts, they have plenty of portfolios they’ve crafted based on various themes and risk tolerances. They do a great job of making investing easy and user-friendly for everyone from the first time investor to seasoned traders. Sign up for free here.
Spending $9.95 per trade to own a basket of 30 stocks is also so much cheaper compared to spending $300 buying 30 individual stocks, or paying a hedge fund manager 2% of assets under management and 20% of fees. Investment fees can cost a fortune over your lifetime if you’re not careful. Consider keeping a core 80% of your investment portfolio in low-cost index funds and ETFs and try seeking alpha with the other 20%. If you never invest, you’ll never win and beat the markets.
5) To diversify your income streams. Not only is it smart to diversify your investments, it’s also smart to diversify your income streams. Jobs are no longer guaranteed for life as they were during our parents’ and grandparents’ generations. Pensions are dying along with employee loyalty.
I’ve lost count of how many people I meet nowadays who haven’t held a full-time job for more than two years. It seems like so many people quit after 4 months, 6 months or 1 year. I, on the other hand, held my last job for ten years! Hopping around so much can hurt your ability to have a 4o1k and meet vesting requirements, maximize stock option benefits and find a desirable, well-paying employer. Before yanking out the plug on your day job, take time to prepare. You can:
- Start a side gig or two and improve your time management skills.
- Take a free course on how to make money online.
- Organize your finances for free, set savings goals, and cut back on unnecessary spending.
- Prepare to negotiate a severance package.
The more income streams you can build today, the less stress you’ll have in the future and the more opportunities you’ll have to invest and grow your wealth.
Give Your Investing Goals A Purpose
At some point, an extra $500 or $1,000 in your investment account may no longer bring you any type of joy. When that time comes, it’s because your investment dollars no longer serve a purpose. The point of investing doesn’t have to be restricted to the five items above. You can also allocate very specific goals for your money, such as paying off all of your student loan debt within two years, saving for a downpayment on your first house, getting an MBA, putting your kids through college, or earning enough passive income to retire early.
You could even invest the money in yourself by going back to university to earn another degree. If your current field isn’t satisfying you, seeing the light at the end of the tunnel could invigorate you and give you a purpose when saving money. After all, if you can pay for your next degree without going into debt, your decision to return to school becomes that much easier. It is estimated that the return on a college degree is somewhere between 14 and 15 percent, which makes it a very sound investment.
Once you earmark your investing dollars for something specific, you’ll find more joy in your investing activities. The same can be said for finding specific reasons to work for a living.
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I couldn’t imagine a reason why you would be in all cash. The great crash of 2008 shows that, as long as you have a long enough time horizon, you should be able to earn a return of at least 6-8% in the stock market. There are many factors that affect the return you will ultimately see such as: fees, diversification among asset classes, dollar cost averaging, time horizon, risk tolerance, market timing risks, etc.
I like to keep some cash but not a lot. I can’t imagine being in all cash! I’m a buy and hold long-term focused investor so I try not to look at my returns too often so I don’t get freaked out. Panic selling is the worst.
A very thought provoking posy Sydney,
I couldn’t have agreed more. Investing is very necessary. Saving your money without investing any is really a foolish idea because no matter how you guard it, you’ll eventually put in your hand there and the money will just be squandered. Why not invest today and enjoy tomorrow?
When i read the book “The Richest Man in Babylon” few years ago. It said that the money you made as a result of certain efforts is required to bring in more money. The book advised that you invest at lest 10% of your earnings. That the 10% should be seeing as your child because it will also give birth to your grand child and that’s how it will keep increasing.
Inflation is everywhere today and i think its even higher in West Africa where I’m from and the only people that will save this generation of ours is entrepreneurs so, lets keep on investing.
Thanks for sharing Sydney and do enjoy your weekend.
Thanks Theodore! Inflation really is everywhere and it sure doesn’t feel like there’s much we can do about it except invest and keep finding ways to increase income!
Thanks for the reminder! I have some cash that I’ve been meaning to invest and have kept getting distracted with work so it’s still sitting in my savings account. I think I’ll buy some low fee ETFs to keep things simple so I don’t overthink things too much. Otherwise I’ll probably just end up procrastinating again.
ETFs are a great way to go. And yes – paying attention to the fees is really important. Some ETFs have crazy high fees, which just isn’t worth it. I also like to look at their volume and avoid ETFs that are too thinly traded.
Good points! I invest to beat inflation and make my money work for me so I don’t have to work for money, forever.
The markets are looking a little dicey at the moment though. Let’s hope the Fed doesn’t raise too much!
Thanks! Yeah, I’d be happy with a slow rise of rates. Let people and businesses ease into things without panicking and throwing the markets all out of whack.