Investing has become an indispensable part of personal finance today. With inflation continuously eroding the purchasing power of money, relying solely on savings in the bank is no longer enough to build wealth. Investing provides the opportunity to grow money and achieve financial goals. There are many important reasons why people should invest – to beat inflation, save for retirement, purchase big-ticket items, leave an inheritance and more. Investing skillfully over the long-term in stocks, bonds, real estate and other asset classes can help investors steadily build wealth and achieve financial independence.
Investing protects against inflation
Inflation refers to the general upward price movement of goods and services over time. When inflation is high, the same amount of money buys fewer goods and services. Investing in assets that appreciate in value, like stocks and real estate, provides a hedge against inflation. While inflation erodes the purchasing power of cash, investment assets often gain value at a rate higher than inflation. This preserves the real purchasing power of the investment capital. Even moderate returns that outpace inflation will mean the investor still has more purchasing power down the road.
Investing helps build retirement funds
Retirement requires a sizeable corpus to maintain the same standard of living without active employment income. Starting early and investing consistently through vehicles like 401ks, IRAs and index funds makes this possible. The power of compounding allows retirement investments to grow exponentially over time. Investing just $200 per month from age 30 potentially grows to over $200,000 by age 65, assuming a conservative 6% annual return. Without investing, very few people would have sufficient funds to retire comfortably.
Investing enables important purchases
Major purchases like homes, automobiles and education often require large lump sum amounts that are not possible to save in a short period. Investing provides the means to accumulate capital for big purchases planned in the future. Investors targeting a specific goal amount simply need to determine the monthly investment required based on factors like investment horizon, expected return and risk tolerance. Investing makes it possible to afford major planned expenses rather than taking on the burden of debt.
Investing helps create generational wealth
Building an inheritance to pass on to children and grandchildren is an important goal for many investors. Investing a portion of disposable income during one’s working years makes it possible to leave behind a sizeable estate. The funds can provide financial security to future generations and enable pursuits like higher education and home ownership. Investments also generate income to support heirs currently through dividends, interest, rentals and withdrawals.
Investing enables building wealth, retiring comfortably, affording major purchases and creating an inheritance. Starting early and investing consistently is key to maximize returns through the power of compounding. A diversified portfolio across asset classes protects against inflation and market fluctuations. Investing is essential for anyone who desires financial security and independence.