Still on the fence about whether to invest? In this article, I will make the case of why investing is essential, and perhaps even necessary for most of us.
The first reason why you should invest is because earning and saving is only half of the equation to building wealth over the long term. When we work, we are “exchanging” our time for money. As we only have 24 hours a day, there is a limit to how much we can work and how much money we can earn using our time. If we want to maximise our earned income by working more hours, we will eventually have to work at the expense of having less time to rest or to do things that brings us joy. Worst still, our mental health will deteriorate and we may become at risk of burning out. Personally, I view investing as making your money work for you, even when you are asleep. As your income from investing increases, it can supplement your main income stream and this means it will free up more time for you to do the things you love such as pursuing your hobbies or spending time with family and friends.
This brings me to my next point, which is that investing can help diversify your sources of income. Diversification one’s sources of income is a topic that is not talked about enough. One only needs to look back at the past year and a half to see why diversifying our income streams is necessary. As Covid-19 ravaged the world and forced many economies into lockdown, many people lost their jobs. If our day job is our only source of income, losing it means having to survive on stimulus checks an watching our savings whittle down. During the same period, the stock market has continued to chug along, rewarding those who remain invested. Thus, a second source of income via investing could potentially help tide us over in a time of crisis. Furthermore, research has shown that generally, the more sources of income you have, the more income you tend to make. With dividends and capital gains being the most common income streams after earned income, investing in equities is a good place to begin.
Next, I view investing as a way to protect your savings against inflation, the silent killer. Today, cash sitting in the bank earns an interest of 0.05%, essentially nothing. Imagine that you saved up a respectable sum of $50,000 by the time you are 30 years old. If you were to leave this sum in the bank, it will be worth less than $33,400 in real terms by the time you reach 50 years old (assuming an average inflation of 2%). Essentially, you would have lost over $16,600 by simply doing nothing. Investing, on the other hand, allows us to earn a return greater than the inflation rate. This grows our savings in real terms, protecting them from being eroded by inflation. Inflation is so deadly because it lurks in the shadows and goes largely unnoticed. By the time people feel its effects, it is often too late. Thus, the sense of assurance we feel when we have loads of cash in our bank account is a false one. If you are not convinced about the threat of inflation, just ask your parents how much a cup of coffee or a bowl of noodles cost when they were a student! Thus, while returns on investing in stocks are not guaranteed, leaving your retirement savings in the bank is a sure way to have your savings eroded.
Lastly, being able to retire on savings alone is a luxury. For someone who earns the median wage of $4,500 in Singapore from 25 years old to 60 years old, being able to save $1 million dollars for retirement seems like an impossible uphill task. They would need to save $2,380 a month, more than 50% of their income, in order to hit this goal. If the same person were to dollar cost average into an ETF that has an 8% annual return on average, he will only need to contribute $465 each month to achieve the goal within the same time period of 35 years. Now that is a much more achievable goal! While I admit that this is a theoretical example, the 8% return is a rather conservative one given that the S&P500 has a historical average return of 10% annually. Furthermore, by saving and investing more than the $465 there will be more leeway for any potential setbacks.
I hope that this post has convinced you about the importance of investing in order to achieve achieve our financial goals more easily. While there are indeed risks involved, as with most things, avoidance is not the solution. Instead, we should recognise the risks involved and understand that successful investing can be achieved with the right strategy and mindset. Thankfully, these are well within our control. If you would like to learn more about investing, check out my other posts on how to invest here. Additionally, I will be sharing which ETFs I personally DCA into monthly so click here to join The Dollar Sapling telegram channel and stay tuned!