Updated Sept. 10, 2021, 9:37 p.m.
You probably heard of a few stories about people who made a big fortune through investing. A skeptic might think, “Maybe they were just lucky, that could never happen to me”. Some people might also believe they don’t have enough money or expertise to invest. Well, you’ll soon find out exactly why they are wrong. You don’t have to be an expert investor, have incredible luck, or start out rich to be able to grow your wealth through the stock market.
It comes down to having a general understanding of how investing works and patience to transform the money that you earn into a fortune. Investing is generally a smart financial decision that will not only allow you to maximize your savings but may also help you grow your money. In the long run through investing, your wealth can also grow enough to reach your financial goals and help you prepare for retirement.
Many readers here are likely already curious about investing or may even be considering partaking in it sometime in the future, but are hesitant in doing so due to worries. We will address some general investing concerns in this article that may hopefully convince you why you should invest right away.
There are a few valid reasons why you shouldn’t invest now, but many more misconceptions. If you are in debt with high interest it wouldn't make sense to invest, because the potential returns may be lower than the interest you would pay. Prioritize dealing with debt first if you are in the red, then you may begin to invest with even the smallest regular contributions.
Another reason to not invest is if you have a lack of financial education. We hope to resolve this problem here, so please continue reading ahead .
It can be discomforting to let go of your hard earned cash and allow the market to decide what it’s worth. You may think that your earnings are in the safest hands with you or kept in a bank, but there is a good reason why you shouldn’t just save your money.
At a glance, storing excess income into a savings account seems to be a safe way to secure your finances. While having savings indicates great habits and financial discipline, it does come with a drawback. Money saved is actually losing its value at about 2.5% each year due to inflation. This means that after a year, every $1000 will have the purchasing power of $975. At this rate, any amount initially saved will diminish to below half its value after 30 years.
Many savings accounts earn a bit of interest that might partially defend against inflation. However, the 0.5% interest typically earned from a savings account is not enough to counter this loss in value. Since cash is depreciating, we should instead reconsider investing our money into companies that grow with the economy, as in the stock market. Not only will you be preserving your wealth, but also you likely could earn higher returns when following best practices.
This is not to say that you shouldn’t have any cash on hand in the event of an emergency. It is advised to retain three to six months worth of living expenses as an emergency fund. Generally, you can still access your investments at any time, but be aware that earnings are subject to taxes. Beyond having a short term fund, it’s still a good idea to avoid the depreciation of your money by investing.
Investing might actually encourage greater savings. Knowing that your money will be put to better use by working for you provides more motivation to save rather than spend. With the added incentive of growth, you might be more inclined to budget a fixed amount each month towards funding your future. Think of this as consistently dedicating a portion of your income for your future self.
Yet another way you can save through investing your income is through tax advantaged retirement accounts. If your employer offers a 401k retirement plan, the amount deposited counts as a tax deductible. This lowers your taxable income so you end up owing less in taxes that year.
You already know that in order to produce wealth, you either work for an income or make your earned money grow and work for you through investing. But how reliably can you build wealth as an investor? Well, having profitable returns is not all based on chance as one might think.
Though the economy is out of their control, investors can still manage their own risk to increase their likelihood of success in the long run. Safety is a matter of having financial education and a basic understanding of statistics. There is no guarantee of a payoff, but we know that following the right strategy can push your odds of yielding a profit in your favor. So what can we expect the average investor to earn?
Let’s take a look at the S&P 500, the benchmark for the stock market which includes the 500 safest and largest companies. Historically, over the last few decades the annual return on investment was typically 10%, or about 8% after adjusting for inflation. Of course, this value is an average and the range of values can include negative returns some years as well as some higher growth years. You can anticipate this average rate of return with greater confidence through decades of investing by owning a representative sample of the S&P 500.
Assuming you invest in the overall market with a 10% annual return, you can expect each $1000 you put in to grow to $1100 in value during the first year. The best part is that the money that you earn also continues to make money at that rate, which means that this growth is exponential! This return rate has a compounding effect that multiplies the value of your investments by 10% more from the previous year. After another year, your balance appreciates to about $1210, which is a bit more than the $100 earned the previous year. After 30 years the initial $1000 that you leave in your investing account grows to become $17449. All your investment needs is time, and you earn an income passively. That is the magic of compounding interest.
This effect snowballs when you consistently make contributions to your account. If you were able to invest just $500 each month, your total contributions after 30 years would be $180,000. That is an impressive savings on its own, but through investing it grows to just over a million dollars! Becoming a millionaire is achievable with a regular income, and this is a significant amount towards retirement. Use our investment calculator tool to explore your financial goals for retirement.
There is always some reason that could be used to delay investing, because uncertainty is inseparable from the market after all. While there is no guarantee that now is the best time to invest, it is likely better to invest now than not at all.
No one wants to be the person who starts buying stocks at peak pricing before it suddenly comes crashing down. Someone might think that since the market is at an all time high, they will just wait for the next big crash before buying shares. But if this were to unfold, the same person could think that the times are too uncertain to invest now. Before they know it, the market recovers, and they miss the chance they’ve been waiting for while losing valuable time for investing.
This kind of procrastination is usually what costs investors the majority of potential profits. Economic disasters are unpredictable events but they happen infrequently. You are better off staying invested in the general market and riding the wave, rather than waiting for the right moment to make a bigger lump sum investment. Since 1950 the market has never returned less than 2.1% in any 15 year rolling period. Keep a long term perspective of a few decades in the market, and the short term fluctuations become insignificant in an overall upward trend.
The biggest factor on your side is time, not money. Often, the contributions that you can make during a longer span of time eclipses the potential gains in the time spent preparing. By staying invested, your fortune may eventually grow so large that you could even withdraw a modest salary and your account will still grow.
You can start investing at any time in your life and from any level of wealth. Financial discipline typically develops early on with young adults, but it is not uncommon for older people to have missed this and start thinking about it later. Anyone at a point in their life who can consistently save a portion of their income could also invest those savings. The sooner you start making informed investment decisions, the more time you allow your fortune to grow to tremendous values.
It makes sense why most of the affluent are investing their money in the stock market, mainly because they preserve their wealth by remaining invested. By instilling financial discipline early on, you will earn a passive income and have financial security for the rest of your life.
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