Disclaimer: This is for informational purposes and is not meant to serve as financial or investing advice.
Did you know that the current form of investing dates back to the 1600s? (The Amsterdam Stock Exchange opened in 1602.)
And countless people have made a lot of money in all those years. There’s no reason you can’t join them through various types of investments. Check out the following 15 reasons why investing is an essential step toward building wealth.
1. A Large Potential To Grow Your Money
Some people stuff money in a savings account or certificate of deposit (CD), hoping to earn additional dollars through interest. And while you can squeeze a little bit of juice from that, it rarely amounts to much. Investing that same money can produce dramatically different results.
So, let’s compare investing versus keeping money in your bank account to help us illustrate an important point. While savings accounts are critical, a prolonged swelling of growth through interest isn’t going to do much for you in the long run.
Let’s say you had $10,000 in a savings account. These accounts pay an interest rate between 0.01% and 1.60%. That means over a year, you could earn between a single dollar to $160. Frankly, that doesn’t move the dial much, does it?
But with investing, the potential for capital gains is far greater. As just one example, let’s look at the concept of compounding. This means your investment generates additional compound interest called “dividends.” Those dividends are turned around and sent back into the investment.
And those then earn their own dividends, which are reinvested themselves.
You can see where this is going: Your wealth can snowball! Of course, the specific numbers depend on the particulars of the investment. But you can have the potential to earn more than $160 in a year with a $10,000 investment!
2. Prepare for Retirement
You have a 0% chance of working forever. At some point, you’ll need to stop working because you simply won’t be able to anymore. What will your financial status look like at that time?
Whether you’re 20 and see that as far-off or 50 at the twilight of your working years, you must be prepared. Hopefully, you’ve been socking away money — not only for retirement but also for an emergency fund.
You can invest that money you’ve set aside for retirement savings, putting those dollars to work in various directions. Once you’re retired, your income can be the money you’ve earned from those investments.
Many people live very comfortable lifestyles due to wise investment strategies they began years earlier. It’s not too late for you to make intelligent decisions
3. Diversify Your Annual Income
Diversification, or having more than one revenue stream, is always essential. Most people earn the majority of their money through their jobs. But what happens if there’s a reduction in force and suddenly you’re out? When you lose a fixed-income job, you may not have enough money to pay the bills.
There’s no guarantee that the position you have today will be there for you tomorrow. By earning money through investments, you can ensure your income never drops to zero. Perhaps after a job loss, you won’t be so worried about how you’ll afford things like groceries or your mortgage payment. In this way, investment plans can be crucial for your overall financial planning.
4. Investing Is Very Affordable
You don’t need a lot of money to kick off your journey as an investor.
Did you know you can start with less than $100? And some companies don’t charge commissions. That makes investing incredibly affordable. Starting with less than $100, you aren’t opening yourself up to many risks.
Of course, a tiny investment won’t necessarily earn you much in return. But the point is that you don’t have to be drowning in money to start.
And little by little, you can add more money to your investment. The more you add, the more potential you have for higher returns. So if you don’t have an enormous risk tolerance, we hope that won’t keep you from dipping your toes in.
5. You Have Many Choices With How To Invest
The term “investing” is rather general. So, let’s get more specific.
You can invest in various asset classes, including the stock market, real estate, businesses, bonds, mutual funds, precious metals, or cryptocurrency. Or any combination.
The point is you have control over where you direct your dollars. Speak with a financial advisor about your personal finance goals, from high returns in the short term to long-term financial security, and they can help you make the best choices to meet those aspirations.
Let’s dive into these investment products a bit for the uninitiated:
- The stock market (also known as the stock exchange) is a group of marketplaces (called exchanges) where shares (pieces of ownership) of companies are bought and sold. Only publicly held companies (meaning anyone can buy their shares) are a part of this.
- Real estate investments are when you purchase property with the hope of it gaining value and generating revenue for you. For example, you can buy an apartment building or single-family home and rent it out. As the property grows in value, you can sell it outright for a nice profit.
- Bonds are different from stocks because you don’t own them. You are lending a certain amount of money to the government or companies, which will eventually pay back with interest. And that interest, on your end, is pure profit.
- Mutual funds are opportunities to pool your money with other people's money (thus the term “mutual”) to purchase different investments. A professional money manager will oversee everything and help everyone in the pool grow their funds.
- Investing in precious metals like gold can be a wise choice to avoid the risk of inflation. This is because you can’t produce more of these metals. After all, they’re a natural resource. Compare this to when the government prints off more money, thus expanding inflation. Now you can see why these metals are attractive investments.
- Cryptocurrency is a digital currency. Instead of physical dollars that you can hold, it’s all virtual. The “crypto” part of the word comes from the fact it is secured through cryptography. This makes it quite tricky for counterfeiting or double-spending to occur. There’s no central authority issuing cryptocurrency. In other words, it is decentralized. That means the government, for example, can't interfere with it. No official authority can. But be careful; this market has a lot of volatility. This means values skyrocket and drop pretty fast.
6. Outpace Inflation
We just mentioned inflation earlier. Let’s zoom in on this a little bit more.
Currently, inflation is a significant problem in this country — but the truth is that inflation has always impacted people. If you average everything out, the usual rate is about 3% yearly.
(This is why people get “cost of living” raises at work of about 3% traditionally. Without this, employees would earn less because their paychecks would lose purchasing power.)
But what if your investments offered you a higher rate of return, something like 7% or 8%? That means the value of your money will outrun what inflation is doing to it, and you’ll be ahead of the game.
7. Meet Your Financial Goals
Investing can help you reach your financial goals more quickly than simply putting your money into a savings account.
Potential goals can include:
- Retiring at an earlier age
- Starting a business
- Funding college tuition (perhaps your own or for a family member)
- Purchasing a home
- Buying a car
8. Grow Your Pre-Tax Money
There are some investment options (like a 401(k) sponsored by your employer) where you can open up a pre-tax account. This means no taxes are applied until you pull your money out later.
There’s another benefit tied to this:
9. Enjoy Tax Advantages
If you experience a loss in a retirement plan, you might be able to apply that loss to profits you make from other types of investments. With the loss lowering the total number of earnings, that means you could reduce your taxable income.
And while we’re still on the subject of retirement accounts …
10. Take Advantage of Employer-Matching Programs
Some companies will match the funds their employees invest into their 401(k) plans — to a certain point. This is basically “free money” and another reason to pursue investing.
You will need to invest in your 401(k) to do this. Find out if the organization you work for offers this benefit.
11. Get In on the Ground Floor of a New Business
There are seemingly endless opportunities to invest in startups. An important thing to remember is that some of them may take off, enriching their original backers.
Yes, there are always risks — some businesses crater. But do your homework and talk to trusted financial advisors who have the experience to recognize a promising opportunity versus an overly risky one. You might be able to not only help a new product or service become a reality — but become very wealthy in the process.
12. Assert a Level of Influence Over Companies
If you invest in stocks, you may get voting rights depending on the circumstances. Essentially, as a shareholder, you get to vote on how that company is run. If you have a lot of experience and wisdom, this will help you further benefit that company. And if the company does well, so do you as a shareholder. It’s a win-win situation.
13. Leave an Inheritance for Your Family
Most people want to ensure their loved ones are cared for after they’re gone. Perhaps you want to leave a nest egg for your children to access once they reach a certain age so they can start a business, get an education, or buy a home.
By creating wealth, you can have an insurance policy that future generations will be provided for in case the sky falls in their lives. While money doesn’t buy happiness, it can help with peace of mind.
14. Support Causes Important to You
If you can successfully invest your money, you can build enough wealth to support charities or non-profit organizations with special meaning in your heart.
Perhaps you lost a loved one to cancer, and as a result, you want to support the American Cancer Society. Or maybe you grew up poor and want to donate to Feeding America.
You can do much good for the world with more extensive financial resources. Investing can help you support the organizations working to change the world for the better.
15. Grow Your Knowledge
As we’ve shared above, there are many different kinds of investments. Unless you have a broker or money manager whom you blindly trust, gaining some knowledge to be strategic about your investments is essential.
As you continue to grow and speak with knowledgeable people, you’ll find you’ll become increasingly well-versed in the investment world. And there’s nothing wrong with being more financially literate!
On top of that, it will also cause you to grow your knowledge about current events. Why? Because world events often have impacts on different types of investments. Examples include the pandemic, natural disasters, government policies, technology changes, and runaway inflation. And those are just a few.
The Bottom Line
Investing can be a very lucrative path. You can start small, review the many options at your disposal, and have the potential to give a very comfortable future for yourself and your loved ones.
Many people do very well with investments and rely on them as a source of income. So can you. One of those sources can be cryptocurrency, which we mentioned above.
Allow us to introduce ourselves.
Pluto is an investing app that helps you automate investing in stocks and cryptocurrencies by building a portfolio of strategies or rules for when to buy and sell.
With us, you can quickly build a portfolio of strategies to watch your investments and make better decisions with your own rules like “if bitcoin (BTC) dips below $20k, then buy.”
Are you interested in learning more? Contact us to get started.