Investment is not just beneficial; it is essential for retirement. Not everyone saves for retirement, and even those who do may not save enough to last throughout their retirement years. A study by the Federal Reserve in 2020 showed that around 25% of non-retirees do not save for retirement. However, everyone needs to invest to build wealth, outpace inflation, and save for retirement and other financial goals.
What is investment?
Investment is the process of buying assets or goods with the goal of generating income and appreciation. Investments, which are the assets or goods purchased, are used to create future wealth. These goods are often stocks or bonds but can also include real estate or alternative assets such as cryptocurrencies or gold.
Why should you invest?
Financial investment is important for several reasons. You want to create wealth to help in times of need, job loss, or for future goals. You also want to take advantage of compound growth while considering inflation, so your money does not lose its value over time. Additionally, if you plan to stop working at some point and retire, investing is important to help you achieve those goals.
How much money should you invest?
While you can invest for short-term goals like buying a home, most people invest to fund their retirement. In the United States, people typically choose to retire at age 65 if they are financially able. This means that for the rest of their lives, they will need to rely on their investments to finance their lifestyle. There are still expenses that need to be paid in retirement, such as utility bills, housing, food, and any trips.
Investment strategy is not one-size-fits-all
Your investment strategy is personal and should depend on your goals and risk tolerance. You may have some short-term goals, such as buying a car or home, along with some long-term goals, like saving for retirement. Understanding your personal risk tolerance is important because different people are willing to tolerate different amounts of volatility in the value of their investments, while some become very anxious if the value of their investment declines.
Narrowing the wealth gap
Investing can also help individuals and communities who find that financial opportunities are stacked against them due to the wealth gap. For example, women may need to invest more and for a longer period to meet their retirement goals because they often earn less than their male counterparts for the same job, and the average global life expectancy for women is seven years longer. Although research indicates that women are better investors than men, they tend to be more conservative in their investments, so they may benefit from a more effective and proactive investment strategy.
How to start investing
You don’t need to have thousands of dollars to start investing. You can save a little money every month to begin your investment journey. Let’s consider a simple example where you save $100 each month from age 25 to 65. If you just put that amount in your checking account, you will end up with $48,000 in 40 years ($100 × 12 months × 40 years = $48,000). However, if you invest and earn an annual interest rate of 10%, compounded annually, your $48,000 will grow to over $530,000. Your money makes money over time.
You can start investing by talking to your employer to see if they offer a retirement account like a 401(k) or 403(b). You can contribute a portion of your salary from each paycheck towards your retirement account and begin to choose from the investments available to you. If a retirement account is not offered at your workplace, you can also invest in an Individual Retirement Account (IRA).
You can
Open an account with a brokerage firm or an online brokerage like TDAmeritrade, Wealthfront, or Charles Schwab. At a brokerage, you can also open a personal investment account to start investing. These types of accounts do not have penalties if you withdraw your money before reaching a certain age, like a retirement account, but they do not have some of the tax advantages that come with a retirement account.
Frequently Asked Questions (FAQs)
Why is diversification important in investing?
Diversification allows you to spread your money across many investments, reducing risk. If one company or asset class does not perform well, diversification ensures you do not lose all your money because you have multiple investments.
Why is investing important at a young age?
Investing early allows you to take advantage of compound growth. It also enables you to start building wealth sooner. If you wait until later to start investing, you might need to contribute more of your salary to achieve your personal and financial goals.
Why is responsible investing important from an environmental, social, and governance perspective?
Responsible investing is also referred to as “socially responsible investing” or “impact investing.” Responsible investing is important because aligning your investment choices with your values and personal goals allows your money to work towards companies that you believe contribute positively to society.
Source: https://www.thebalancemoney.com/why-is-investing-important-5222360
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