Why Do I Need To Invest?

 

Welcome to Step #1.  In the words of Homer Simpson, the first step is unfortunately NOT also the last step.  But I'll keep it simple here for you beginners.  It’s a wonderful day to start investing and begin the journey to your personal financial freedom!  I'll explain how to get started in this section, but first, let's cover why you should start.

Have you ever heard your grandma tell you that she remembers when candy bars only cost a nickel? Well, she's not full of shit; they used to actually only cost a nickel.  I’ll admit on occasion I even whip out the “I remember when gas when only $0.99 a gallon!”, so I’ll lay off grandma for now.  The reason for these huge changes in price over time is inflation, or the weakening of our money's value.  As time goes by, the amount of goods/services that our dollar buys us decreases, leaving our money worth less and less by the day.

So…what the hell, right? People used to deal with this by putting their money in a savings account where they'd receive a cushy 5% interest for their trouble with no risk at all. Well, I'm sorry, but that doesn't work anymore...now that banks offer less than 1% interest, compared to your dollar losing roughly 3.22% of its value per year over the last 30 years due to inflation.  Banks still want you to know they are very excited about their shitty interest rates. We've got Jerry Stiller on the CapOne commercials telling (yelling at) us that they offer 5X the interest rate of competitors.  I will do the math for you on what this actually means.  A shitty interest rate (below 1%), multiplied by 5, equals a slightly less shitty interest rate.  What I'm trying to say is that keeping all your money in a savings account in today's world is essentially the same as allowing the government to stop into your living room once a year, punch you in the face, and then take 2.22% of your net worth away. And no one wants that.  So you won’t keep all of your hard earned money in a savings account.

Now enter the stock market, which boasts historical returns of 7% annually OVER inflation. Problem solved. Sure, it doesn't come with ZERO risk on an annual basis but as long as you invest with an organized, long term plan, you won’t have to worry about the normal ups and downs, or even a recession, one bit.  It’s fairly easy to glance at a down day, month, or year in the stock market and lose faith or stress that you’re losing your hard earned money.  In the history of the stock market, it has always proven to return our 7% annually, and while it might not look like it in the tough times; we should sleep well at night knowing that it has ALWAYS made money for investors that are patient.

There is one pool of money you keep that won’t go into the stock market.  This should be an emergency fund of money you keep in your savings account.  I know, totally boring. As I said, we are developing a long-term strategy for our investments, so they shouldn’t be cashed out to handle unexpected expenses that inevitably arise.  It’s a good rule of thumb to keep anywhere from 3-6 months worth of expenses in a savings account for emergencies.  Now, I don’t mean to lecture you, because personally I hate seeing money sit my saving account, but it definitely reduces stress to know you won’t have to scramble if something goes wrong.  And, let’s face it; something will go wrong eventually for all of us.  Before you curse my name for jinxing you, know that you’ll be prepared for them financially.  Usually, unexpected problems bring stress with them, so you don’t need compounded stress knowing you don’t have the money available to cover them.  Keeping this emergency money in the stock market can be very risky if the market takes a downturn and you are forced to sell off stocks at a discount.  Given the volatility of the market at times, we don't want to invest any cash that we might need in the next 1-2 year window.  Although, ultimately this emergency fund will be losing value in your savings account, a key piece of my philosophy is money isn’t worth saving if it doesn’t allow us to sleep well at night.  Since you will have money in your investment account, you’ll be looking at more of a minor kick in the shin than the full punch in the face.  In the next articles, I’ll get into how to start your investing accounts and the strategy I recommend for working toward our financial freedom one month at a time.

Anyone have any reservations about getting started?  Feel free to reach out with any questions or comments!

 

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http://monthlycents.com/2015/11/01/why-do-i-need-to-invest/

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