WHY INVESTING IS THE MOST IMPORTANT STEP IN SAVING
In the previous Financial View, we looked at the important financial concepts to grow your wealth. They can generally be summarised as understanding why and how you plan to grow your wealth. Generally, the most critical thing to understand is that wealth creation is often prioritising the long term over the short term. It takes a long time to build a large investment balance, and it takes discipline to make sure that one sticks at it. Building on the basic financial concepts we now can differentiate in this article between investing and saving.
This is where the concept of investing becomes so critical. Investing involves actively choosing which products and asset classes will help your money grow – the aim being to reach the point where your money is working for itself, and you enjoy the benefit of compounding.
When it comes to financial planning, saving money is often the first step people take. Saving is ensuring that you put aside some of your income. You save instead of spending, and we have seen many examples of great savers over the years but not everyone does anything with the funds that they have put aside. However, while saving is crucial, investing is what truly propels your financial growth. Here’s why investing is the most important part of saving:
Spend Less than You Earn
This is the first step, always put something aside for a rainy day, for retirement you should contribute at least 10% of your income towards retirement savings every single month. The sooner you start and the more you put in the easier it becomes to reach your goals.
Beating Inflation
Inflation erodes the purchasing power of your money over time. If you only save and do not invest, the value of your savings diminishes as interest paid by the banks is often lower than inflation, especially if take into account the impact of taxation. Investing in asset classes like stocks, bonds, or property can help ensure that you earn returns that outpace inflation, preserving and growing your wealth.
Compounding Interest
One of the most powerful benefits of investing is the ability to earn compound returns. This means you earn returns not only on your initial investment but also on the returns that the investment generates. Over time, this can significantly increase your wealth. Albert Einstein famously called compound interest the eighth wonder of the world, stating “He who understands it, earns it. He who doesn’t, pays it.”
Achieving Financial Goals
Whether it’s buying a home, funding education, or planning for retirement, investing helps you achieve your financial goals faster. By allocating your savings into various investment vehicles, you can grow your money more efficiently and reach your targets sooner.
Diversification and Risk Management
Investing allows you to diversify your portfolio, spreading your money across different asset classes both locally and internationally. This diversification reduces risk because the performance of different investments can often offset each other. A well-diversified portfolio can provide more stable returns over a long time.
Building Wealth
Simply saving money in a bank account offers limited growth potential. Investing, on the other hand, provides opportunities to build substantial wealth. By taking calculated risks and investing wisely, you can create a financial cushion that offers security and freedom.
Passive Income
Investing can generate passive income through dividends, interest, or rental income. This additional income stream can supplement your savings and provide financial stability, especially during retirement.
While you are still working you can use the passive income to reinvest in your existing investments, compounding your growth.
Financial Discipline
Investing requires a level of financial discipline and planning. It encourages you to regularly set aside money and think long-term. This disciplined approach not only helps in growing your wealth but also instills good financial habits.
While saving is an essential part of financial planning, investing is what truly accelerates your financial growth. By understanding the importance of investing and making informed decisions, you can protect your savings from inflation, returns can outperform inflation helping you to achieve your financial goals, and building lasting wealth.
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