Investing is an important aspect of managing one's finances. Most people understand this. It can help to create wealth, meet financial goals, beat inflation, and save for retirement. But why is investing better than saving?
One reason investing is better than saving is because of the power of compounding over time. According to The Balance, "even small amounts of your money can earn money faster due to the power of compounding." This means that the interest earned on an investment is reinvested, creating a snowball effect that leads to greater returns over time. So don't wait to start until you have a large sum, you can start with even the small sums. You have to start somewhere.
Compounding works because of the concept of time. Investing early and as soon as possible is crucial for achieving financial security and reaching long-term financial goals. The power of compounding capital over time is one of the key benefits of investing, as even small amounts of money can grow significantly over time due to the reinvestment of interest earned. So, again, it's never too late to start, the earlier the better. If you're thinking you should have started investing many years ago, you are right, but the second best time to start is now.
Another benefit of investing is that it promotes discipline. UFCU states that "when you create a consistent investment plan, you're in essence saving money to earn money. Setting aside money every month for investing will keep you from spending that money on unnecessary expenditures." This discipline can be especially beneficial during retirement years.
Historically, investing has also provided better returns than guaranteed investments such as bank accounts and CDs. GoBankingRates says that "since 1926, the SP 500 has returned an annual average of 10.05% per year" while "savings rates at banks are still hovering in the very low single digits, and are not expected to rise significantly, even with the federal funds rate rising."
Investing also ensures present and future long-term financial security. Money generated from investments could provide real financial security and income and investments like stocks and ETFs can provide a passive income in the form of dividends. This means that you can earn money simply by holding an investment, which can provide a steady stream of income over time.
Inflation is another reason why investing is a superior alternative to saving. The Daily Budget writes that "as prices go up, so do the prices of investments. This means that your money will be worth more in the future if you invest it now." Investing can help to hedge against inflation, ensuring that your money retains its value over time.
In summary, investing is important for a variety of reasons, including the power of compounding over time, promoting discipline, providing better returns than guaranteed investments, ensuring present and future long-term financial security, and hedging against inflation. It's a better alternative to saving as it will give you more return and hedge against inflation. Investing is important because it builds true financial security and it's the key to achieving your long-term financial goals and financial freedom.