I am not a financial advisor, but through all my years of schooling, I've gained a tremendous amount of knowledge through the years. I've helped many college grads and older individuals get started with investing. I know investing sounds daunting or a stretch. One of the common things I hear is I can barely pay my bills so why would I want to invest?
Well, I understand paying your bills is priority number one, however its hard to believe investing $5 or $10 a week is a stretch for most people. I'd strongly encourage doing a needs assessment for what you need vs what you want. As a college graduate, I was burdened with over $55k in debt. Instead of buying a new car, I picked up a used car. Instead of going out every weekend, I alternated and kept $100 limit for when I went out as some personal examples of needs vs want assessment.
There are two concepts that helped change my thinking towards investing.
- The power of compound interest
- Inflation
Why is compounding interest so powerful? Lets look at this way -- Let's say you save $10 a week, which means you've saved $520 for the year. Now we will keep this regiment for 10 years and assume we return 2% a year. Before you know it, you will have saved $5,255 over that time. Each year, your money grows and your return goes up a little.
I took a very simplistic approach, but I wanted to illustrate the power of compound interest. You might say, well that return is nothing. Yes, you are right given 2% return.
Lets say you took that same $520 a year and invested into the S&P 500 Index fund such as SPY over the last 10 years with an average return of 13.86% over the 10 years would equate to $9,218. From this $9,218, I havent calculated dividends, and load fees, which would push this savings to a higher rate, but for this example I wanted to keep it super simple to illustrate why investing is vital.
Now couple that with the concept of inflation. Inflation is simply the increase in prices over time. Lets say 10 years ago an Orange cost 10 cents per orange, now it costs $1 per Orange (drastic example). However your wages remain the same where you earn $500 a week. Your purchasing power has decreased where $1 used to buy 10 Oranges but now only buys 1 Orange. Everything around up goes up over time, which is why understanding this concept is so important.
Essentially, you want to stay ahead of inflation to maintain your buying power. One of the major reasons why investing is so important. How do you start investing is a topic I'll save for later.
I'm not a financial advisor, not certified by any means but I am just sharing my experiences to help common individuals stay ahead in life.
If you have any questions/comments/feedback - please drop a comment.
