Key Takeaways

• Investing has the potential to help build wealth more effectively than simply saving.

• If you don't invest, inflation may severely erode your purchasing power over time.

• With the power of compounding, your investing returns can grow exponentially.

• The earlier you invest, the more opportunities you have to grow your money.

What is investment

By investing your money, you can achieve your financial goals. Investing has the potential to help build wealth more effectively than simply saving.

When you invest, you commit your resources (such as time and money) with the hope that you will profit in the future.

Ideally, if you invest in an asset at the right time, your investment would be profitable. An investor might buy stocks believing that they will appreciate in value or collect dividend payments. A student might invest his or her time and energy to earn a college degree, hoping to start a fulfilling career with it.

Inflation may erode your purchasing power over time

If you don't invest, inflation can severely erode your purchasing power over time.

Nowadays, savings rates haven't kept up with the inflation rate, which means that if you put all your cash in savings alone instead of investing it, your actual purchasing power could shrink over time.

This chart shows the impact of inflation on the purchasing power of a fixed, annual $50,000 pension. It's essential to understand the effects of inflation because, all else being equal, it reduces the number of goods or services you can buy (your purchasing power).

As the chart shows, a fixed, annual pension of $50,000 can only purchase $37,200 worth of goods or services after ten years (a 26% loss of purchasing power) and $27,684 worth of goods or services after 20 years (a 45% loss of purchasing power) under an assumed 3% inflation rate.

The power of compounding

With the power of compounding, your investing returns can grow exponentially.

The "magic" of compounding is that growth drives more growth, which helps your money accumulate faster.

Let's look at an example. Alexis invests $3,000 a year for 40 years, earning an average annual return of 6%. After 40 years, her portfolio is worth $492,143. This amount consists of a total return of $372,143 and her investment principal of $120,000. 

How did her portfolio grow so much? This is because each year, Alexis's 6% return is on a new, larger balance (made up of her initial investment, her subsequent yearly investments, and the money she earned from interest on her investments). That's the power of "compound returns."

NOTE: This hypothetical example is for illustration purposes only and is not intended to be representative of actual results or any specific investment, which will fluctuate in value. The determinations made by this example are not guarantees or projections, and no taxes or fees/expenses are included in the calculations which would reduce the figures shown. Please keep in mind that it is possible to lose money by investing and actual results will vary.

Start investing earlier

Investing, as with anything in life, benefits from starting early. The earlier you begin planning for retirement, the greater your potential return on investment.

Investing is a lifelong marathon. Generally, The earlier you invest, the more opportunities you have to grow your money; the longer you invest, the less impact the short-term ups and downs of the market will have on your return. 

Many investors keep waiting for the "right" time to invest. Unfortunately, timing the market is virtually impossible. So, start investing straight away and remember this old investing adage: Time in the market is more important than timing the market.

You don't have to be a genius to start investing. You just need to know a few basics, form a plan, and be ready to stick to it. No matter how much or little money you have, the important thing is to educate yourself about your opportunities.