Investing is laying out money now to get more back in the futureWarren Buffett
Investing is becoming a more sought after way to gain an extra income nowadays. With inflation up and interest rates down, people are looking for different places to store their money.
Everyone has their own reasons as to why one wants to invest their money. Some are aiming for quick cash, and depending on what investing instrument you’re using, this might actually work. Others aim for the long-term, maybe even for retirement. Whatever the reason, investing is getting more acknowledged by the mainstream. And it should.
If you want to start investing, there are a couple of things you should consider. You can read about the fundamentals in this blog. Always make sure to do your own research and you might even want to brush up on your financial literacy, so you actually know what you are talking about.
Now let’s discuss the reasons why one should invest rather sooner than later.
1. Investing in a safe haven
With the current global crisis, all flaws of the current economic system are being revealed. Governments are printing trillions of dollars out of thin air and stock markets have gone through the worst crash in a decade, if not longer. Our cash is vulnerable.
For this reason, a so-called safe haven suddenly becomes very attractive to many. A safe haven is an investing instrument that is barely influenced, or not influenced at all, by a pandemic or economy crash for example. Safe havens would include Gold, Silver and allegedly, Bitcoin.
Even though these examples also showed a dip during the current pandemic, they recovered much quicker than any other assets. Gold had recovered within 2 weeks and withing a month it even reached a 3 year high and soon after, even reached an all-time-high. Bitcoin had gone back up to pre-pandemic levels in a month as well. And even though Silver took a little longer to reach the same level as before as well, it did bounce back from its dip immediately.
This data shows that these assets can be more reliable during harsh times and that is why they are so attractive to the people.
Inflation has been around for decades. But what is it exactly? Inflation is the devaluing of your money. A great, but extreme example would be the situation in Venezuela in 2019. Their inflation rate was measured at 10,398% per year last year. People had to carry around backpacks full of cash in order to buy toilet paper.
As I said this example is extreme. Generally the inflation rate would be less than 10%. If we look at the global inflation rate from 2017, 2018 and 2019, they were 3,2%, 3,62% and 3,56% respectively. This average of 3,5% might not seem much, but if it stays consistent like this, we well definitely feel it in our pockets.
Now add in the fact that most banks have lowered the interest rates to nearly 0% on savings accounts. There is no way the money in these accounts can compete with inflation if it is parked there. Over the years your money will, in fact, gradually decrease in value. This is why savings accounts are becoming less interesting. As a result, people are looking for alternatives.
If you want your money to be able to compete with inflation, it is wise to start investing in assets that earn at least 4% a year. This way you will stay ahead of inflation.
3. The Compound Effect
During the first year a $1,000 dollar is invested and it earned 6%. The second year the investment is worth $1,060 dollar and again, 6% is earned. But only this time the investment increases with $63.30 dollar instead of $60. This will leave you with $1,123.30 dollar, which will earn you another 6%.
The compound effect is a phenomenon that shows how powerful exponential growth can be. Simply put, exponential growth is growth based on rates or percentages.
The example above only shows a very small part of the compound effect, but when you are investing for many years, that is when it becomes significantly bigger. I posted an example on my Instagram, that perfectly shows how powerful the compound effect really is. The compound effect is also the reason why you should start investing now rather than in 10 years. The growth accumulated will be more generous.
4. Aiming for the long term
Similar to saving, investing is a great way to collect and put aside money for retirement. One big difference would be that an income earning asset is more effective than a savings account. In fact, if you devote more money to an asset than the average, you might even speed up the process to retirement. This in turn will grant you more freedom to do as you please.
All of a sudden, putting your money into an investment becomes more interesting to those that want to ‘retire early’. I personally prefer the term ‘financial free’ over ‘early retirement’. I mean, are you really gonna sit on the sidelines after you turn 40 or 45? Anyhow, investing can definitely boost that goal.
5. Quick cash
There are also ways of investing that allow you to make a quick buck. This is generally called day-trading. I personally find this to be riskier than obtaining long term assets, but can definitely be useful if you are in need of some quick cash.
If you choose to get involved in day-trading, beware of the potential risk. My advice would be to consider the invested money as already lost and definitely find someone with experience who can help you pick the best trades.
If you weren’t sure whether to start investing now or not, I hope this helped you take that step. Starting now definitely has is definitely more beneficial than waiting. Just remember to have done your research, but even then, there might still be times when you lose your money. Investing is never fully without risk.
Lots of love,
Disclaimer: this blog post merely contains my opinions and personal experiences. These blog posts are not to be perceived as financial advise for investing or other monetary activities. Readers are to realize that managing their money is their own responsibility and they have to make their own decisions.
I am not a (professional) financial advisor nor do I claim to be one.