7 reasons why investing is important

When learning about personal finance, you’ve likely heard that investing can be an important part of a forward-thinking financial strategy. But what does that actually mean, and exactly why is investing important? It comes down to putting your money to work: when you invest, your funds have a chance to grow instead of sitting idle. Cash savings under your mattress won’t earn returns; even if your money’s earning interest in a savings account, that growth might not outpace inflation. 

Investing has the potential to help you build a more secure financial future in a variety of ways. If you’ve never fully appreciated all the reasons why you should invest, you’re not alone. This quick primer can give you the knowledge you need to understand the benefits of investing and help you get started with confidence.  

In this article, you’ll learn:

• Why investing is important
• 7 reasons why you should invest
• What to consider before investing

Why is investing important?

A long-term investment strategy could help you buy a home, send your children to college, pay for your retirement, or accomplish another big financial goal. According to a recent Gallup poll, about 61% of Americans of varying ages and income levels invest in the stock market. In addition to individual stocks, there are many other securities you can invest in: mutual funds, exchange-traded funds (ETFs), bonds, real estate, and more. 

Both saving and investing money are options for growing your money, but they aren’t the same thing: 

• Putting money in some types of savings accounts gives you a chance to earn compound interest and keep your money liquid (i.e., easy to access quickly). But returns are often lower than investing, and rising inflation can eat away at the value of your savings. That’s why saving is generally ideal for short-term financial goals and building an emergency fund.

• Consistent investing can be a fruitful strategy for reaching long-term goals: it gives you the potential to grow your money more over time and combat inflation. You can often get a higher return with investing versus saving, but you may need to keep your money invested for the long haul to realize any gains and recover from any swings in the market. 

It’s never too early (or too late) to begin investing whatever amount you can afford, so don’t worry if you need to start small. Consistently contributing to an investment account can help you build wealth steadily as you work toward far-off financial goals.  

7 reasons why you should invest

Why should you invest? The simplest reason is to grow your money. But let’s get into some specifics about what that really means and the reasons why it can be worth it for you to invest. 

#1: To combat inflation

Inflation, or the overall increase in product prices over time, can wreak havoc on the value of a dollar. Your spending power will decrease as inflation rises; investing can be a way to combat that inflation. For the last 50 years, the stock market has returned an average of 10% per year, compared with a 3.8% average inflation rate. 

#2: To build wealth over the long term

When your money itself makes money, your wealth grows. Your investments can appreciate in value, you can earn and reinvest dividends from stocks, and you can take advantage of compounding returns, all of which could increase the value of your investments over time. This is why investing may be better than saving for increasing your wealth throughout the course of your life. 

#3: To take advantage of compound interest and returns

Compounding is the percentage of money you earn on top of your original investment plus its earnings from previous periods. It’s essentially a process in which the money you earn from investments itself makes more money. For example, you can reinvest the interest from bonds or the dividends you receive from stocks so those earnings go to work along with your principal. 

#4: To generate passive income

In our side hustle culture, there are dozens of ways to generate passive income, and there are several investment options in the mix. Bonds, dividend-paying stocks, and index funds are generally lower-risk, less volatile investment vehicles that can provide a steady stream of income without active management. When you invest in bonds, the issuer pays you regular interest over a specified period. Dividend stocks generate fixed income in the form of dividend payments, and index funds often include dividend-paying stocks. You can also generate passive income through real estate investments. And the best part is that passive investment strategies require little to no effort from you.

#5: To plan for retirement

Trends indicate that most Americans need between $1.2 million and $1.5 million to retire comfortably. For many people, living off social security alone isn’t enough once they leave the workforce. The earlier you start contributing to a retirement account, the better chance you have to reach your retirement savings goal. Once you calculate how much you’ll need to retire, you can choose which type of retirement account is best for you and start investing.

Each type of retirement account has specific rules and tax benefits: 

• Individual retirement accounts (IRAs): A traditional IRA lets you invest pre-tax dollars and grow your money tax-deferred. A Roth IRA, in contrast, is funded with post-tax money, and qualified withdrawals in retirement are tax-free. 

• Employer-sponsored retirement accounts: If your employer offers a 401(k) or 403(b) plan, you can invest a portion of each paycheck before taxes are deducted, and your employer can match your contributions so your account grows faster. 

#6: To benefit from tax advantages

Speaking of retirement planning, tax advantages are one of the primary reasons why investing is important for long-term goals. With traditional IRAs, 401(k)s, and 403(b)s, your money grows tax-deferred, meaning you don’t pay taxes on your contributions or earnings until you withdraw your funds after age 59½. Roth IRAs provide slightly different tax benefits: you pay income tax on your contributions, but qualified withdrawals after retirement are tax-free. 

Retirement accounts aren’t your only option for reducing taxes on investments. Income from municipal bonds is often tax-free, and certain investment accounts like health savings accounts (HSAs) and 529 education accounts provide tax benefits when you use the money for qualified healthcare costs and education expenses, respectively. 

#7: To build generational wealth

Life insurance is just one way to ensure that your family is taken care of after you’re gone. Investing can also be an effective tool to build generational wealth and peace of mind for your loved ones. For example, your Roth IRA can be passed down to your heirs, who will receive the tax advantages when they inherit the money. Another reason why you should invest might be caring for your kids: investing in educational accounts or custodial accounts can help your children shoulder less student loan debt and start adulthood with a financial leg up. 

What to consider before investing

Investing isn’t a one-size-fits-all situation. What’s right for your unique needs and circumstances may not work for your neighbor or your co-worker. There is always risk and the potential for reward, but there are no guarantees. Before you invest a single dollar of your hard-earned money, consider these four things:

• Understand your comfort with risk: How much loss and volatility are you willing to tolerate in your investment portfolio? Your comfort with investment risk should inform the types of investment choices you make.

• Pay off high-interest debt: Getting out of high-interest debt like personal loans and credit cards before you put money toward investing can cut down on the amount of interest you pay and bolster your financial security. Plus, it may help you build better credit and bump up your credit score. 

• Build an emergency fund: Be prepared for the unexpected with cash savings. Your emergency fund is your insurance policy against unplanned medical bills, home repairs, job loss, or other sudden expenses. A solid emergency fund can save you from pulling money from your investment accounts when life throws you a curveball.

• Determine your financial goals: Knowing what you’re working toward helps keep you motivated, focused, and realistic. Saving for a downpayment on a new car requires a different timeline and investment strategy than accumulating $1 million for retirement. Learn to set financial goals so you can determine the best approach for reaching them. 

How to start investing

Getting started with investing can seem overwhelming at first. But your first step is relatively easy: open an investment account. From there, you might want to seek investment advice from a human financial advisor or an automated robo-advisor. Your advisor can help you decide which types of investments and asset classes make sense for your investment portfolio based on your risk tolerance and goals. As you continue investing over time, a robo-advisor can even rebalance your portfolio to make sure your asset allocation stays aligned with your investment strategy.

Why is investing important? Because your financial future matters.

The reasons why you should invest will ultimately be personal to you. For many people, investing is important because they can potentially earn better returns and build financial security for the future. Investing may also be significant for those who want to make their money go further and ensure their spending power outpaces inflation. To determine your own motivation for investing, you might want to determine three reasons why you should invest based on your own priorities. 

So why should you invest now? It’s all about the timeline: the sooner your money is invested, the longer it has to grow. When you’re working toward long-term financial goals, investing now is important so you have plenty of time to ride out stock market fluctuations and benefit from compound interest and returns. The good news is that you don’t have to wait until you have a significant sum to start investing.

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