So now that we talked about what investments are, you may still be asking: but do I really need to invest? See my new disclaimer in the footer, but YES you should definitely invest. Other than keeping money in your pocket for the future, here are my top 3 benefits of investing:
Reason #1: Take advantage of compounding
Compound income/profit is making income/profit off of your income. Because we can invest with interest, money now can be worth more at a later point in time. For example, $100 today is worth more than $100 in a year because we can invest $100 and turn it into $102, if invested at a 2% interest rate. This concept is called the time value of money. Compounding is when we invest that $102 and turn it into $104.04 in another year, again assuming a 2% interest rate, thus making money on your profit.
See the table below for how investing $1000 grows over the years at different interest rates. The values in the table equals how much the $1000 you invest today will be worth at age 65, depending on how old you are today and what annual % gain you can achieve.
|Annual % gain||45 years old today||35 years old today||25 years old today|
As you can see, a little bit of saving now can go a long way in the future, but the key is to start early.
Reason #2: Combat inflation
Check out this link that talks about inflation in Canada. Inflation is real! The same basket of goods that cost you $100 in 2002 would cost you $136 in 2019. That works out to 1.8% a year every year. With this rate in mind, putting your money in a savings account is not going to keep up with inflation…This video talks about another way inflation shows itself, its called shrinkflation and no this is not the “it was cold scene” from Seinfeld (which is also linked for convenience).
Reason #3: Pay less tax
Many countries offer registered saving accounts which provide a tax shelter on investments. In Canada, its called your Registered Retirement Savings Plan (RRSP) and in the US it’s called a 401k account, either way if you invest money in a registered savings account, your taxable income is reduced and you can save on taxes. It’s possible that you may even get a return at the end of the year. Again see the disclaimer in the footer and check with your accountant to make sure that contributing to a registered saving plan makes sense for your situation.
Bonus Reason: It’s pretty satisfying watching your wealth grow. If you follow my instagram I will start sharing some of my trades that I made some satisfying profits on, stay tuned…
Hope you enjoyed this post and let me know how you invest in the comments below. Stay tuned for my next post, which will be on key principles I try to live my life by.