Many people know there are benefits of investing, but they still feel intimidated by the markets and the mechanisms that rule them. Still, understanding what you can do with your money (or rather, what it can do for you) is a motivator to learn.
In the following article, we examine the 10 benefits of investing that can motivate anyone to become the next Warren Buffett. Let’s begin!
1. Avoid Frivolous Purchases
Before we get into the heart of our investing tips, let’s point out one of the huge unsung benefits of investing that often gets overlooked. Pouring more of your money into investments prevents you from making frivolous purchases.
Don’t misunderstand. It’s okay to splurge on yourself from time to time, but you should analyze the long-term benefits of making that purchase versus redirecting the money it requires into an appreciable investment.
Are you still going to be using your purchase in one, five, 10 years? Are you buying something you want with money that could be used towards debt?
Are you ignoring necessary expenses on the horizon to make the purchase? These are the types of questions you should be asking before each big-ticket purchase.
2. Allow Your Money to Work for You
Investing allows your money to work for you instead of the other way around. Of course, the phrase “let your money work for you” means putting it into the position to create passive income for you.
Buying stocks, mutual funds, bond funds, cryptocurrencies, and other investments, give you the opportunity to beat inflation and grow the amount and the purchasing power of your money over time. Yes, they’re not without risk. But many of these investments have traditionally beaten inflation (2-3 percent each year), which is more than can be said for a money market account at your local bank.
3. Hit Your Retirement Targets
Another benefit is being able to retire. Without the 5-10 percent gains that investors routinely see from stock and mutual fund index funds, retirement might never happen.
What it takes to require comfortably is always on the rise. Honing the knowledge you possess of the ways to invest will allow you to keep pace.
4. Get a Higher Rate of Return
The returns from traditional banks seldom pay above one percent, which, as we’ve already mentioned, is way below traditional inflation averages. If you’re only getting one percent on your investment and inflation is 2-3 percent, then your money’s purchasing power is shrinking every year.
People who don’t understand the markets make the mistake of thinking that stocks and mutual funds are riskier. Not so!
You can track the year-to-year performance of the stock for decades. Generally speaking, the ROI numbers are much higher.
5. Meet Financial Goals You Have Set for Yourself
Another of the investing benefits you can enjoy is being able to meet certain financial goals you’ve set for yourself. That could be buying a car with cash to avoid monthly payments, placing a downpayment on the home of your dreams, or paying for your child’s college.
You might have to pay additional capital gains taxes on any investment earnings that get you there. However, that’s better than being saddled with high interest rates and the need for an ongoing payment to finance a lifestyle you can’t afford.
6. Tax Advantages
Investing your money consistently can also save you a bundle in taxes. This primarily occurs in two ways: pre-tax and deferred tax.
With pre-tax savings, what happens is this. Your employer sets aside part of your salary for a retirement account that’s usually managed by a team of proven investors who can guarantee a better-than-average return. Since this reduces your taxable income, you pay less to the government on your weekly earnings.
Saving for retirement in a deferred tax plan, such as what exists with individual retirement accounts, means you delay paying taxes until you start to withdraw the money in smaller amounts as you reach retirement age. The logic is that you’ll no longer be working, so you won’t be in as high of a tax bracket as you pull out funds in small increments, thus resulting in lower bills over time.
7. Getting Free Money
Not every investment opportunity offers free money, but a large number of them do through employer-funded retirement accounts. Working with an employer that offers 401(k) matching means that anything you contribute gets doubled up to a certain percentage.
Many employers match up to 5 percent. That means the $5,000 a year in a pre-tax contribution that you make automatically becomes $10,000 thanks to your employer’s contribution for participating.
Never leave free money on the table. If a matching program is available to you, always take advantage of it!
8. Starting a Business
Another important benefit of investing is that doing so consistently can allow you to pursue bigger dreams, like starting your own business. Many freshman investors find themselves looking into trading tips for this very reason.
They want their name on something, or to create their own brand that builds a life beyond what they can get from the 9-to-5. If you’re the entrepreneurial type, managing risk effectively and investing with consistency can help you accomplish your goals faster.
9. The Fun of It
New opportunities and even volatile opportunities like cryptocurrencies and foreign exchange markets (FOREX) can be fun to play around with. While we consider that a benefit, it’s one that comes with a disclaimer. Never invest more in these platforms than you can afford to lose, as their volatility can be overwhelming.
10. Taking Care of Loved Ones
The desire to take care of loved ones has made many more people investors today than ever before. With a variety of easy-to-use platforms, the rise of algorithmic trading, and automated trading with Tradestation software, it’s easier to learn and take control.
The knowledge and freedom that comes with technology empower families to pool resources and take care of each other. In that sense, recent advancements have truly humanized investing for the masses.
The Benefits of Investing Are Clear
You cannot compare the markets to traditional bank investing and miss the benefits of investing. They’re obvious. Whether you’re driven by one or all of them, you’ve got plenty of reasons to put your money to work.
Know your “why” before you begin, be comfortable with risk tolerance, and be determined to come out on top. Good luck! For more financial tips and information, check out some of our additional posts!