Why you should invest
To understand what investing your money can give you for benefits is extremely important. If you don’t know why you should invest money chances are that you don’t invest and miss this opportunity. And if this would happen I can guarantee you that it is impossible to achieve the same results with that little effort. When you always wanted to invest your money to ear interested or you recently thought about it, this article will give the motivation to go through all the necessary steps by showing you the amazing results you can achieve by investing your money. These results will be displayed by a graph that shows you the difference between normal and compound interest. So you can understand that investing even a small amount is totally worth it.
Let your Money work for you
The trade that everyone who works in a normal job does it to trade time against money. You go there, get paid for the time you work on things that your boss wants you to work on, and come back home.
There are multiple ways to get out this so-called hamster wheel.
If you, for example, write a book your income is based on the number of sales and the price of the book, not on the amount of time you spent writing it. But we want to talk about letting your money work for you.
If you let your money work you also have time-independent income, so you don’t trade time against money more. You earn interest on your invested capital.
Scaling things up
This is really good for you because you can scale things up. If you now think about the normal work again, you are only able to trade 24 hours, because the days don’t have more. In fact, it will be less, because you also need time for sleeping, eating, social activities, etc. you are only able to trade-in 60 hours per week if you are a real hustler.
How much do you earn per hour, unlimited? And if the answer to this question is no, I am pretty sure that you aren’t able to earn an unlimited amount of money just by trading time against money. But if you let your money work for you other things matter.
You earn interest on the amount of money that you invest. The interest you earn is typically not unlimited, even though it is possible to get an unlimited ROI.
So the other part is the amount of money that you invest, which is potentially unlimited. Even though it is not possible to invest unlimited money. It is more possible than working more hours as a week has. Oor earns more per hour than the company you work for isn’t.
I hope this benefits of investing your money is clear for you.
Another point is that if you don’t invest your money you want to save up it loses his value. I am sure you already heard about inflation.
Inflation essentially means for you that you aren’t able to buy the same stuff you were able to buy a few years ago with the same amount of money.
This loss of value comes from the FED who is printing new money. For investing this essentially means that you lose money if you don’t invest while earning money if you invest. For me, that is a pretty solid reason to take my money from the bank and throw it into the stock market.
So stop working for your money, let your money work for you.
If you want to invest it is pretty clear that you need money to invest it first. The easiest way to make this possible is by having a look at your income and your spendings.
If you have a close eye on that you can make sure that your spendings are way less than your income. And you can invest everything that you would have spend. Keeping an eye on this is called budgeting. And if you didn’t know what this means I would highly suggest reading this article about it:
I am sure you already heard about a 401k plan, and I will give two very good reasons why you should use your 401k plan if can use one.
A reason to participate in this program is that you can reduce the taxes you have to pay. This is because the amount you are going to contribute to your 401k plan is based on your pre-tax earnings. Therefore the amount you pay into the 401k will decrease your taxable income.
For Example, let’s say you earn $1,000 pre-tax and you want to put 7% into your 401k plan. This means that you will lower your taxable income by 7%. So instead of paying taxes on $1,000 you only have to pay taxes on $930. This is because you will have to pay taxes later when you sell your 401k plan. That is a pretty good reason to participate there.
The next huge thing that should bring into actually using your 401k is that many companies have an employers match program. This means that the company you work for will but the same amount as you into your 401k, up to a specific point.
This is an extremely strong opportunity. Because it means that you earn more while paying fewer taxes. And you automatically invest your money which brings many benefits to you.
If we compare it to the example we already used above it would mean that you get a loan raise by 7%. Because you would get paid $1,070 pre-tax. This is already pretty good, but if we now compare with the point above you earn $1,070. While reducing your taxable income down to $930. That sounds like a pretty good deal to me.
What means compound interest
I am sure that you have heard about compound interest bevor, but chances are that don’t know-how whats this means for you and how you can use it for advantage if you invest your money. Compound interest is, in general, the interest that you get on your earned interest.
So if you invest your money you will earn interest, and if you don’t pull this interest out of your investments the next time you earn interest it will be the interest on your initial investment plus the interest on the interest you earned.
So if you invest $100 to 10% p.a. after a year you will have $101. The $100 that you invested plus the $1 you earned in interest. In the next year after that, you will earn $1.10 in interest and therefore have $102.10. So you have $100 initial investment $2 interest you earned and $0.10 compound interest.
This sounds really boring and like it is nothing. But over time it will be the biggest part of your investment.
If you think over the effect this has it is huge. Just image that you would only earn the normal interest. Because you withdraw it all the time when you get it.
If you now visualize the money you earned in interest compounded each year you are going to see a straight line upwards. Because you get the same amount of interest every year.
And if you think about compound interest in the same diagram, you won’t just get a straight line. You would get an exponential growing line.
This comes because you will get exponential growth. If the amount you have invested by a set percentage each time period. Basically that what you get if you get compound interest.
As you can see the amount you earn in interest if you don’t pull the interest out of your investment grows exponentially.
Compound interest on $1.000
By now it should be clear to you that the effect this has becomes huge. But to shows you how big it really gets I want to show you a real example. Where you can see what would happen to your money over time if you earn interest on it.
For that, I will assume a time period of 40 years. Because if you would start to invest money you don’t need in the next few years in your 20s it is realistic that you are able to hold to this investment until you are in your 60s and start to retire. And if you invest your money in the stock market over that period you can be pretty sure to get an average return.
I will assume that you invest $1,000 because this is a fairly small amount that you can relate to if think about investing. It also will help me to show how huge the factor really is and you can calculate pretty is what you can expect in general if you invest your money.
Even because I will take the average growth factor from the S&P 500. For those who don’t know, the S&P 500 is an index that combines the performance of the biggest 500 companies in the US. That means that everyone can just buy this index and get the performance of 8% per year.
I marked the initial investment in blue, the compounded interest you get on your investment in red and the compound interest in yellow.
This should give you a pretty good picture of why Albert Einstein called the compound interest the eighth world wonder.
If you are able to invest some money it is probably a pretty good idea to do so.
But before you just go and buy the S&P 500 with all the money you have, I would suggest you read my article about how to invest first.
There you will get tips on how you can get more than 10% guaranteed interest and what steps you should take before throwing your whole money into the stock market:
Thanks for reading!
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