Invest To Beat Inflation and Grow Your Wealth
Investing is often misconstrued as gambling or an extremely risky way of trying to get more money. This couldn’t be any further from the truth. Investing can come in many forms other than just real estate and the stock market, and they each play a different role in generating wealth and being inflation.
There are multiple investing strategies to choose from. But the best way to invest in the stock market is buying into an index or ETF that tracks the S&P 500. The S&P 500 has achieved 10% annualised returns since its inceptions in the early 1920’s.
I am often asked, why should I invest when I can lose money investing, yet my money is 100% safe in a savings account?
Below are my 3 best reasons why you should invest your available funds rather than keep them in a savings account.
There are few certainties in life, with Death & Taxes being the most prominent. Neither of which I am a big fan of. Taxes are required to help build a strong country, provided they are being used properly this is okay.
You’re already being taxed at your marginal tax rate on any income that you earn. Some people may not know that they are also being effected by what is called the “Stealth Tax”. The “Stealth Tax” is technically known as Inflation.
Inflation is the rate at which the price of goods and services increase over time, inflation is currently around 2%. This essentially means your money devalues each year by 2%. So $1,000 in 10 years time won’t be able to buy as much as $1,000 today would.
How is Inflation Relevant?
So coming back to the question asked above, is your money really 100% safe in a savings account? No, it is not, in actual fact its value or buying power is decreasing each year by 2%.
So if you kept $100,000 in your savings account for the next 10 years, with an annual interest rate of 1.5% you would have $116,054.08. We know that inflation also occurs at a rate of 2%. So in actual terms your savings would be “decreasing” in value by -0.5% (1.5% – 2% = -0.5%) leaving you with $95,111.01 worth of buying power in 10years time.
If you had invested that $100,000 into the S&P 500 over the same 10 year period you would have $259,374.25. Assuming a 10% annualised return. Take into account inflation and that would equate to $215,892.50 worth of buying power.
This example shows that while you won’t physically lose any money by keeping it in a savings account, it will actually decrease in value over time. Compared with investing, where you can physically lose money, but it returns significantly more, and protects against inflation.
Compounding is often referred to as the 8th wonder of the world, as it is quite amazing how powerful it can be. Essentially it is where your earned interest then goes and makes more interest, helping to accumulate more wealth.
If you bought $10,000 worth of shares in a company that has a 5% dividend yield, and reinvested your dividends for 10 years (Assuming share price stayed the same), then your returns would look like this:
After 10years you would have $16,288.95 this shows that your compounded value is $6,288.95. That is your interest earning you more interest over time.
The longer you have for compounding interest to work, the more magical it becomes. It is the only time I have enjoyed looking at an exponential graph!
Compounding does also occur in your bank account, but as shown previously the returns are currently not even enough to match inflation. So it is important to get compounding working in your favour to match or even better, beat inflation, so that you continue to build your wealth.
Most people work for about 45 years before they reach retirement age at 67years old. In Australia the average life expectancy is 82.5years. This means after reaching retirement you have about 15.5 years until you reach average life expectancy.
You will need 15 years of funds to live off in retirement. Otherwise you will need to be supported by the Government. If you live longer than 82.5 you will obviously require more money to live off. This is where you could end up running out of funds.
While it is great the Government is supporting pensioners currently, there is no guarantee this will happen in the future. I would hate to get to retirement in 40years time not be prepared and find that the Government is no longer going to support pensioners.
That would cause a lot of stress for myself and my family. I wouldn’t want this to occur, especially as I may not be in a position to work anymore.
This is where using the power of investing and compounding can really help set you up for when you retire. If you could invest $200 per month for 45 years, at 10%p.a. return, then accounting for inflation you would have $927,613.48 to live off in retirement.
This should be more than enough to help support yourself in retirement, and the earlier you start the less you need to invest to achieve a large sum of money. Utilising the magical powers of compounding interest is an amazing thing for building your long term wealth.
Inflation eats away at your money’s value if only kept in a Bank account. Look out for high interest accounts, like 86400 Bank for your emergency fund, otherwise put your money to work.
Investing can not only help protect your funds against inflation, but also has the potential to exponentially increase your wealth. Utilising compounding interest and investing you should set yourself up in the future. Ideally you will have enough money to fund yourself and not rely on the Government in your retirement.