Just imagine you are in your 60s, you no longer have your job, though you still need money to fulfill your daily needs. You still need money to buy food, pay the bills, commute, and more importantly, there will be health expenses as you grow old. So, how will you manage all these expenditures without a source of income? Well, that answers the question of why is investing important!
How to Define Investment?
You reap what you sow!
— A Proverb
If you plant a seed, you can expect it to grow into a beautiful tree and expect to reap the fruits, and that applies well to the investing term as well. It is a thoughtful decision to put aside a certain amount and put it in instruments that will lead to yield in the future. Note that investment and savings are different. Investment is generally done for long-term goals, while savings are more for urgent situations or short-term.
“Every investment is a saving, but not every saving is an investment.”
The earlier you start investing, the more benefit it would give. The investment provides long-term financial security to you as well as to your family.
Types of Investments
There are multiple types of investment to choose from like equity, bonds, Equity Traded Funds (ETFs), Canada Savings Bond (CSB), mutual funds, etc. All of these options serve differently and provide different returns. To choose the best suitable option, you need to decide on the following things.
- Your goal – For example, buying a house
- The time period of your goal – 10 years
- The amount you want to invest – 1000 dollars each month
- Your risk tolerance – 3:1 (which means that to earn $3 you can risk $1)
Also, you should conduct your own little research to have an idea of what are the historical returns of your chosen option.
For understanding which investment option to choose from as per your risk appetite, the following information will help you.
- Treasury Bills – Low to no risk
- Guaranteed Investment Certificates (GICs) – Low to no risk
- Government Bonds – Low to no risk, i.e., Canada Savings Bond (CSB)
- Corporate Bonds – Low to medium risk
- Mutual Funds – Low, medium, high risk as per the fund you opt for
- ETFs – Low, medium, high risk as per the fund you opt for
- Stocks – High risk as they are equity investments and volatile in nature
You should also consider a few more things like your job profile and stability, your savings, debts, how faster you can liquidate the funds, and when will you need money. These aspects help you make an impactful decision that you won’t regret later.
Now that we know what all it takes to make an investment, let’s look at the most important question– Why is investing important?
Why is Investing Important?
1. Serves as Long Term Financial Security
As stated earlier, investments make life easier. It helps gain stability in life in terms of financial security. There is a famous quote by Warren Buffet that says that if you want to create wealth, you should make money even when you are sleeping. Of course, that’s not possible just on the basis of your job.
And at this time, even jobs or businesses are not guaranteed to be turnout positive, we have recently seen layoffs due to the COVID-19 pandemic. So, your work or business may involve uncertainty, but your investment would not.
Yes, there are downside risks of investment that the value of your portfolio may reduce in case of a financial crisis, but that can be tackled by investing in a diversified portfolio. And in the long run, you are more likely to gain money than to lose it. The short-term losses are just the noise of investing.
2. Aids at the Time of Retirement
Retirement is the period when you would finally have time for yourself and your loved ones. You would have worked hard all through your life, and now is the time to enjoy your days doing things that you always wanted to do. But to have a happy retired life, you need to have a stable bank balance. Otherwise, along with the daily needs, your medical needs would also create a big hole in your pockets.
That’s where you will know why investing is important. If you are earning a stable income and have a secure job, there is no way you should avoid investing in a good retirement plan. It can also help you retire early, will keep a track of your savings and when you would finally retire, you will still be able to maintain a comfortable lifestyle or even better one.
3. To Take the Benefit of Compounding
Let’s understand compounding in a simple manner. Imagine you are investing $1000 in a fund that has an interest rate of 25 percent calculated annually for 12 years, after a year, it turns to $125. And now the following year, you will get an interest on $124, which would make the amount $156.25. At the same rate, you will have $1455.19 at the end of the 12th year. Have a look at this chart below.
The example was of a very small monetary amount, you can imagine the magic of compounding for a good investment amount. The first thousand will take time, but after that, you will be swiped away with the power of compounding.
4. Inflation-Adjusted Return
“How many millionaires do you know who have become wealthy by investing in savings accounts? I rest my case.”
— Robert G. Allen
Investing is essential to pace up with the increased inflation. Just saving is never enough, you may have your cash in a bank, but will it give you adequate return to beat inflation. The answer is a big NO! You have to plan and take a little risk to invest your money in funds that can help you create wealth.
In many cases, inflation even reduces the value of money you have in a bank fixed deposit or savings account. Imagine realizing that the $50,000 you saved 5 years back, worth only $48,000 now. Inflation does this dirty work, and that would be the last thing you would want to happen to your hard-earned money, right?
5. To Fulfil the Goals
We tend to always be ambitious about our goals, some of us want a new luxury car, some would want a house by the beach. Some may want to travel the world, and some may just want to retire early. The list of goals goes a long way, and if you want to make your goals and dreams a reality, you need to understand why is investing important!
Make a proper plan of your goals, by when you want to achieve it, and how much money you can afford to invest for that particular goal. The next thing is to analyze and invest in a suitable investment instrument, and you are done, enjoy your dreams!
6. Tax Benefits
A lot of funds are given liberty to be deducted from the income side of your tax filing, meaning that you have to pay lesser tax and also get the benefit of investing! In Canada, the government has approved TFSA, RRSP, Roth IRA, 401K, etc. to have lower tax rates or even zero.
Amazing isn’t it? It is like you are not just favoring your future self, but also reaping benefits at the present time. What else you want after that!
7. To be Independent at Any Stage of Life
No one likes to ask people for helping them financially, but if you don’t plan your finances well, you may end up seeking aid. Thus, investing is very important. You can also invest in short-term instruments that can help you cover your near-term goals like opening a small bakery business or taking up a course at university. It will make you independent, strong, and confident.
“Money is not everything, but it is also not nothing.”
A penny also worth more than a penny in times of need. So, in any state in your life, if you can, you must invest. Even if it’s a small amount, it doesn’t matter. Just do your part of the work, and the rest will be taken care of!