Hey!
Earlier, I talked about how many of us fail to consider our financial life seriously. By doing this, we self-impose financial crutches. By not actively considering/thinking, we deprive ourselves of opportunities that can ease our lives financially.
So, as a first starting point, in this post I list out reasons why we all should start investing seriously. Understanding that investments are important is the first step into your financial journey.
Reason #1 : Be the master, not the slave. Make money work for you.
If there is one thing that separates the wealthy from the rest, then it is this:
“The wealthy make the money work for them. Whereas, the rest work for money.”
This concept is so simple yet so powerful. The wealthy are the masters of the money. The rest are slaves that work for money. Many of us fail to grasp this. This is the financial crutch #1 that we impose on ourselves.
So, how can you make money work for you rather than the other way around?
Investments!
Investments help make money work for you. Please forgo the notion that you should trade your time/effort/life to make money. Please throw out this society-indoctrinated notion out of your head!
Instead create an “investment army” that will do the work for you. Be the commander. Command this investment army to “recruit” more “money” for you.
Reason #2 : Understand compound interest, the most powerful force in the universe (Your recruiter).
Sure you all understand compound interest. We all did those silly compound interest exercises in high school. But you know what Einstein said about compound interest:
“The most powerful force in the universe is compound interest”
Now you are thinking : Wow, wait what! Einstein said that! What’s so powerful about the compound interest? What the hell did I miss in high school?
To make you understand how powerful it is, allow me to introduce you to a very smart girl named Cindy. When Cindy turned 7 years old, her lovely grandmother gave her B’day present : A check of $1000. Instead of spending it on candies or toys, Cindy deposited this money in an account that would give her 12% compound interest per year. She forgot about this account and went about her life.
Fast forward and now on her 68th B’day, she was reminded of her old bank account. She went to draw the money in it. Guess how much money she had in her bank account.
A whopping : $1,005,308.57!
Yes, Cindy is a millionaire now.
In this case, Cindy had harnessed the amazing power of compound interest. Slowly a small amount can snow-ball and become an avalanche of money. Compound interest is the powerful recruiter for your investment army. Understand him, make him your best friend and he will work for you. 12% interest is not wishful thinking. By investing it is very easy to achieve a 10%-12% compound interest.
Start investing and let the compound interest do the work for you. Watch your powerful lieutenant recruit huge number of “money” soldiers for you.
Reason #3 : Early to INVEST and early to rise, makes a man healthy, WEALTHY and wise.
Another concept that many simply fail to grasp is early investing. Many postpone investing for later stages of life. Often the reasoning is:
- “Hey, I am young and this is the time to have fun. Investing is for the oldies and I will think about when I get old.”
- “Investing, why bother! Let me a get a master degree. I will make buttloads of money and compensate.”
Sure, have fun. But is investing, something you have to start later in your life?
Hell no!
Sure, you will make buttloads of money later. But, will you really be able to compensate?
No, stop deluding yourself!
To drive my point, allow me to introduce you to Cindy and Jim.
First meet Jim. Jim’s is a typical story. He passed high-school at 18. Then he went to college, had great fun and graduated with a masters degree. Now he has a well paying job. During his studies, he never cared about investing. But now he is 26 and starts considering investing. He is able to save $24,000 per year from his well-paid job. He deposits this in an account that gives him 10% compound interest per year.
He deposits $24,000/year until he turns 42.
Next meet Cindy. She too passed high-school at 18. Instead of postponing, Cindy knew a SECRET (revealed later). Because of this secret, Cindy starts saving early and investing. By different means she is able to earn and she saves a modest $12000 per year. She deposits this money in a similiar account as Jim’s, i.e. a 10% compound interest account.
She deposits $12,000/year until she turns 42.
So, guess who is the millionaire at the age of 42? Cindy or Jim?
Cindy!
The secret that Cindy knew was that : When it comes to investing, it is not about how much you invest. It is more about how early you start to invest.
Don’t be a Jim. Learn from Cindy. Be like Cindy, start investing and do that early!
Reason #4 : Beware of Inflation : The money stealer!
The reasons listed above explained how investing helps you. These are the “dangling-carrot-in-front” encouraging approach. Here, I will take an alternative approach. I will take the “stick” approach. I will try to scare you into investing.
Do you know if you own some money and not invest, you are actually letting it be stolen every single day! The stealer is Inflation. Surely, you have heard of him or at-least come across his trails. Remember how you favorite candy from childhood costs almost as twice as much now?
This is because of inflation. Simply put inflation is sustained increase in price levels of goods over a period of time.
So how does this inflation steal from you? Again, let me illustrate with an example.
Assume you have saved up $100 today and the price of you favorite chocolate is $20.
So today, you will be able to buy five of your favorite chocolates.
Now with an inflation rate of 3.22%1, 28 years from now, the price of your chocolate will double. This is shown in the following figure.
With the same money, due to inflation, you are able to buy much less than what you were able to buy before.
Although, you have the same $100, your real purchasing power drastically decreases.
Isn’t this stealing? You hard earned money is half-as-worth 28 years from now!
So how can we combat this? How can we safeguard ourselves from the inflation thiever?
You guessed it correct, Invest!
You can think of Inflation as similiar to storing you money in a bank account with -3.22% compound interest per year.
To offset this negative corrosion, we should introduce investments. As I said earlier, you will be able to get 10%-12% returns easily.Now combining inflation and investment,
Real compound interest = Positive investment increase – Negative inflation decrease
Now it is like storing your real purchasing power in a back account with ~6.8% (=10-3.22) compound interest per year.
My point is you have a lot to gain by investing, and more importantly, everything to lose by not investing. So choose wisely and start investing.
Reason #5: Become financially independent
This is by far my most favorite reason for considering investing.
Are you going to inherit a ton of money from your from parents?
Or are you seriously working on a business or a startup?
Well, then congratulations! I am jealous of you and you don’t need investing.
So for rest of the typical folks like me, the main source of income is from a regular job. I don’t know about you, but I don’t want to trade 5 days in a week for 2 days of freedom (weekends) for the rest of my life. I want 7 days of freedom in a week. I do not want to keep working for money. At a certain point, I want to stop working for money but still be able to pay by day-to-day bills. This is financial independence (FI) for me. FI can be achieved using investments.
I will skip the details here, but in a later post I talk about how FI is not some wild dream, but a practically achievable goal.
Also, many of you might be wondering why the hell should you save money and invest, rather splurging on some pleasure at present. What and why am I sacrificing for?
My answer : Financial Independence.
Conclusion:
So, there it is! The reasons to invest.
A quick recap:
- Wealthy make money work for them. Investments are one way to do this.
- Understand the power of compound interest. Compound interest are the recruiters in investments. Befriend them and they will recruit more and more wealth for you.
- It is not about only how much you invest, it is more about how early you start investing.
- Beware of Inflation. You have everything to lose by not investing.
- Become financially independent.
Hopefully, you are pumped up and considering about investing now. All the best in your investment journey. Please feel free to leave comments or ask questions.
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Ciao!
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