Why Invest?
There are many reasons to start investing as soon as possible, but two of the main reasons are:
To keep ahead of inflation
When people say, "I'm not an investor," it's often because they worry about the potential for loss. It's true that investing involves risk as well as reward. However, there's also another type of loss to be aware of: the loss of purchasing power over time. During periods of inflation, each dollar you've saved will buy less and less as time goes on. According to the U.S. Department of Labor, the average annual rate of inflation during the past 20 years has been approximately 3%. At 3% annual inflation, something that costs $100 today would cost $181 in 20 years.
To take advantage of compound interest
Anyone who has a savings account understands the basics of compounding: The funds in your savings account earn interest, and that interest is added to your account balance. The next time interest is calculated, it's based on the increased value of your account. In effect, you earn interest on your interest. Many people, however, don't fully appreciate the impact that compounded earnings can have, especially during a long period of time.
Let’s take a look at a hypothetical example*:
Say you invest $5,000 a year for 30 years. After 30 years you will have invested a total of $150,000. Assuming your funds grow at exactly 6% each year, after 30 years, you will have more than $395,000 because of compounding over time. This is the power of earning interest on your interest over time!
Compounding has a "snowball" effect. The more money that is added to the account, the greater its benefit. Also, the more frequently interest is compounded — for example, monthly instead of annually — the more quickly your savings build. The sooner you start saving or investing, the more time and potential your investments have for growth. In effect, compounding helps you provide for your financial future by doing some of the work for you.
* This is a hypothetical example and is not intended to reflect the actual performance of any specific investment. Taxes and investment fees and expenses are not reflected. If they were, the results would have been lower.
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