Investing: The Important Key to Building Long-Term Wealth
For anyone looking to grow their long-term wealth, there is one core principle to begin delving into: investing. It can be an intimidating word, evoking a long list of emotions. However, it doesn’t have to be negatively-interpreted, but rather a subject worth researching and understanding.
The core of investing comes down to putting your army of dollars bills to worth, rather than sitting in the coffers of your bank account or under your mattress. And investing comes in many different forms, including investing in the stock market, investing in real estate and much more.
But the importance of investing can be difficult to quantify for the average American. A recent Gallup poll reports a staggering 38% of Americans don’t have any money invested in the stock market. While this group is largely making less than $40,000 per year, there are still people potentially with some income that can be put towards investments that don’t.
And the core theme to investing isn’t the amount of money, it’s about how much time you’re invested.
Here’s what you need to know about investing to build long-term wealth.
Why investing is crucial
One of the most significant challenges that savers face is the eroding power of inflation. Over time, the value of money diminishes due to rising prices, effectively reducing the purchasing power of your savings. While stashing cash in a savings account might seem secure, it often fails to keep pace with inflation. In contrast, investing in assets that historically outperform inflation, such as stocks and real estate, allows you to protect and even grow the value of your money over the long term.
Capitalizing on compound interest
Compound interest, often hailed as the "magic" behind investing, is a force that amplifies the growth of your money over time. Unlike saving, where your funds might earn simple interest, investing enables you to earn interest not just on your initial investment, but also on the accumulated interest over the years. This compounding effect can lead to exponential growth, turning relatively modest investments into substantial wealth over the long run.
Building a diversified portfolio
Saving is limited in its ability to generate diversified wealth. Investing allows you to create a diverse portfolio tailored to your risk tolerance and financial goals. A well-diversified portfolio spreads risk across different asset classes, industries, and geographic regions. This not only protects your investments against individual setbacks but also ensures that your financial well-being isn't tied to the fate of a single savings account.
Hitting long-term financial goals
While saving is crucial for short-term needs and emergencies, investing is tailored for achieving long-term financial goals. Whether you're aiming for retirement, funding education, or leaving a legacy, investing provides a mechanism to accumulate the resources needed to fulfill these aspirations. Saving alone might not generate the returns required to accomplish such objectives within your desired timeframes.
Saving isn’t enough, you must invest
Throughout your entire life, you’ve likely heard that saving money is important. Yes, that is true. However, it’s nearly impossible to simply save money your entire life and grow that to be a large enough nest egg for retirement. You must invest. Here are a few examples:
Under the mattress vs. investing
Let’s say Sarah and Joe both begin their financial journeys at 18 years old. Sarah is consistently investing $100 a month in the stock market from age 21 to 55, while Joe is simply saving $100 a month under his mattress during the same time.
Assuming a 7% rate of return, Sarah will have an estimated $164,000. And the wild part of that growth is that her total investment was $40,800. Joe, on the other hand, has the same $40,800, which has eroded in value due to inflation.
Putting money in a savings account vs. investing
Nick and Melissa start putting $300 per month away for retirement for a total of 30 years. However, Nick goes with the savings account route returning 1% per year and Melissa decides to invest in an S&P 500 index fund that returns 8% per year.
At the end of the 30 years, Nick is left with $126,477 and Melissa has a whopping $440,445.
Investing in an individual stock vs. investing in an index fund
Let’s take a trip back in time to August 1993, when Ryan’s friend told him that he should be investing in Culp stock. He decided to bury $10,000 with the promise of holding it for 30 years. He told his friend Tara about this, and she decided to challenge him to see if investing into an index fund tracking the S&P 500 would be better. So she buried $10,000 into an index fund tracking the S&P 500. Neither of them sold.
Tara won. In the last 30 years, the S&P 500 has returned an average of 10% each year. Culp was trading around $7.80 per share in August 1993. Now, the stock is trading around $5.50 per share. So his $10,000 investment would now be worth closer to $8,000.
The bottom line
Investing in the stock market consistently is one of the tried-and-true ways to build long-term, sustainable wealth. Saving money is still an important cornerstone of building sustainable wealth, but if you’re aiming to take significant jumps ahead, investing your army of dollar bills into companies and assets is the likely way to grow your nest egg.
Credit Cards Demystified: How They Work and Their Benefits
Credit cards are now the most popular payment method in the U.S., but many people have misnomers ...
Establishing Credit: A Comprehensive Timeline and Why It's Crucial
Your credit score might not be something you think about every day, but it has a significant ...