Whether you love it or hate it, it’s an undeniable truth that money runs the world. It’s been fundamentally built into how our society works and is a virtual necessity for your immediate, day-to-day life. Even more important is having enough money for your future, with the emphasis being on enough. Once you factor in inflation, which is often referred to as an invisible tax on wealth, making sure that you have sufficient funds for your future years can be a difficult task.
For these and many more reasons, it is vital to ensure that you invest your money wisely to secure your financial future. Today, our team at Fogel Capital Management, INC. in Stuart, FL, will help shed some illumination on why investing is important for your financial well-being, especially in retirement.
Saving versus investing
A common rookie mistake is to assume that saving and investing are two financial actions that can be used interchangeably; in fact, nothing could be further from the truth. If you are seeking to invest, it’s first important to understand the fundamental differences between saving and investing.
Saving money can be defined as taking your cash and setting it aside in a safe, secure, and liquid securities account. A liquid account is able to be accessed within a short period of time. Examples of liquid securities accounts include checking accounts or savings accounts that are FDIC secured. There is minimal risk involved, if any (particularly if it’s FDIC insured), and saving is generally for smaller, short-term goals.
Investing, on the other hand, is focused on securing and growing money for major goals. Investing can be defined as the process of taking existing money and using it to purchase an asset you believe will generate an acceptable rate of return over time. There is a margin of safety, although there is far less security than with saving. Your cash is harder to access but provides the potential for much greater returns. Investments can appreciate over time, which causes your net worth to increase. Common forms of investment include productive assets, such as real estate, bonds, or stocks.
The importance of investing
Before you begin investing, it’s important to ensure you have sufficient saved funds. As investing comes with some risks and is a long-term process, you need to have enough savings for the near future, generally for the next few years. You must have enough savings for all personal expenses and bills, such as any loan payments and mortgages. Once you have sufficient funds stored away for unexpected emergencies, you can focus on investing. Of course, it’s important to continue saving as possible.
There are multiple reasons why investing is strongly recommended to stay ahead of the curve, including:
- Beating inflation: As mentioned earlier, inflation dramatically reduces your spending power. To put this in perspective, $100 worth of goods in 1960 would cost a staggering $500 in 1995—4.8% compound inflation eradicated a stunning 80% of your purchasing power. Simply funneling a few hundred dollars into a savings account will not do enough to help you outpace inflation over the years; investing in mutual funds and stocks will give you a much better chance to stay ahead of inflation.
- Making your money work for you: It’s part of your job to work for your money. Why not turn the tables around and have your money work for you? With compound interest, you can accumulate interest that allows you to earn additional money without any extra effort. Investing $1,000 at 7% interest, compounded annually, would turn out to just over $7,600 over 30 years, allowing you to beat inflation.
- Saving for retirement: As you work, you need to save for your future. Once you stop generating substantial income, your financial future needs to be secure. Investing allows you to live off these funds in later years. Invest according to your risk preference. Greater risks offer greater rewards. If you invest in a retirement fund, such as a 401k, you can also reap benefits by investing pretax dollars, allowing your taxable income to be reduced.
The earlier you begin investing, the higher the potential for compounding. As your investments begin to produce earnings, they can be reinvested, allowing you to earn even more money. However, beginning a long-term investment program requires more than just a cursory knowledge of the options available to you, especially if you want to minimize risk and increase the potential for growth. From property rentals to real estate to mutual funds, there are a plethora of options available. What’s important is to realize that there is no one-size-fits-all approach. Your current employment, financial assets, family size, and many other factors play a role in choosing the best investment route for you.
At Fogel Capital Management, INC., we offer personalized investment advice in Stuart, FL. Do not hesitate to contact us to discover how to best manage and invest your money for your future. Call (772) 223-9686 to speak to an investment advisor.