Why You Should START Investing And STOP Waiting? An Ultimate Beginner’s Guide
Picture this, Lisa, a diligent professional in her mid-twenties, sits at her desk, a nagging sense of unease creeping in. Despite her stable job and regular paycheck, she can't shake the feeling that there's more to life than this daily routine. As she scrolls through her social media feed, Lisa stumbles upon a post about financial independence. Intrigued, she begins to explore the concept further, discovering tales of individuals who have achieved remarkable levels of financial freedom through the power of investing - people who have broken free from financial stress and are living life on their terms. Inspired by their stories, Lisa decided to take her first steps towards financial liberation.
You may wonder, why to invest? Well, let me tell you – having an additional source of income isn’t just about accumulating wealth or fattening your bank account. It's about gaining control over your own time, creating room to pursue your passions, and attaining greater financial autonomy. And investing is the key that unlocks this door to financial independence.
Still unsure if investing is the right path for you? Let me present a few more compelling reasons that make investing an exceptional vehicle for achieving your financial aspirations.
1. Unleash The Power Of Compounding
Let's face it, many of us don't think about investing until we're well into our 20s or 30s, even though we may have opportunities to invest before that. The greatest asset in investing is money. The second most significant asset is time. Why does investing early make a big difference? One word, Compounding, and a phenomenon genius coined it as below.
“Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t … pays it.”
To put it in numbers, say you invest 1,000€ this year, and you earn a 10% return on that money. That means you make 100€ on your original 1,000€ investment, and, as a result, you end up with 1,100€. What if you don't contribute anything next year? Guess what—you still make money. How is that possible? Say you earn the same 10% return on your 1,100€ account balance. Instead of 100€, you earn 110€ because you're getting that 10% on a larger balance.
Now, you have 1,210€ simply because you let compound interest do its thing. This looks like only a small profit, but trust me, as time goes by this little growth can serve as the fuel for extraordinary growth like a chain reaction. It can be so logic-defying that you underestimate what's possible, where growth comes from, and what it can lead to.
Now let’s say you start saving at age 25 and invest 1,000€ euros a month for ten years in a row. You stop investing at the age of 35 and then let the compounding do its magic.
Now let's take your friend who begins investing ten years later at age 35 and sets aside 1,000€ a month for 30 years. At an average return of 8% per year, at age 65 you would accumulate $2 million by age 65 and your friend would have just $ 1.5 million. That's the power of compounding, it pays to invest early. The same is being paraphrased as below.
“Money makes money. And the money that money makes, makes more money”
So, all you have to do is, keep investing and be patient.
2. Beat Inflation With Strategic Investing
Remember how our grandfather could see a movie for a dollar? Well, now it costs you 10€, 15€, or even 20€ to see a movie. That's because inflation makes the price of products and services go up over time. To put it simply, think of inflation as the slow but steady force that makes things cost more over time. If you don't beat the inflation rate, you'd ideally be losing money.
For example, if you save 10,000€ this year and put it under your mattress for the next 30 years, it won't be 10,000€ when you take it back out. I mean, yes, it will still be 10,000€. But it won't be worth what it was worth when you put it under the mattress. It's the same situation if you leave it in your savings account. The interest offered by the banks nowadays is too low to counter inflation. The desired inflation rate of most national banks is around 2%. That means if you do nothing, your money loses about 2% of its value every year and becomes worthless and less. Even if we are optimistic and put a 1% interest gain on your deposit, the money still loses 1% in value every year. And with the pandemic and the governments pumping money into the market, the inflation rates are at all-time highs.
3. Take Control Of Your Financial Destiny
The Financial Independence, Retire Early (FIRE) movement is gaining momentum, offering a roadmap to financial freedom and early retirement. It's not just about amassing wealth, it's about gaining control over your life. A billionaire investor once said this.
“I did not intend to get rich. I just wanted to get independent.”
FIRE empowers you to design the life you desire by diligently saving and investing from a young age. By laying a solid financial foundation, you can potentially retire in your forties, rather than waiting until your sixties. Join the FIRE movement today and take the first step towards a future of abundance and autonomy.
4. Secure Your Retirement Future
To live out your golden years in style, experts say your retirement income should be about 80% of your final pre-retirement salary. That means If you make 100,000€ annually at retirement, you would need at least 80,000€ per year to have a comfortable lifestyle. Please don't assume that much of what you'll need will come from Social Security because it probably won't. Germany established its first Social Security system in 1889. Since then, public retirement insurance has been "pay-as-you-go," with the current pensions of the retired paid from the current premiums of the not-yet-retired. That means there is no guarantee that the Government will provide you with an allowance once you retire.
Unless you're independently wealthy, it's essential to sock away money and invest it wisely. One helpful formula is the 4% rule, where you divide your desired annual retirement income by 4%.
For instance, aiming for €80,000 annually would require a retirement nest egg of about €2 million (€80,000 ÷ 0.04).
This strategy assumes a 5% return on investments, no additional income, and maintaining your current lifestyle. Even if we can't make 2 million dollars by the time we retire, most of us would need to build nest eggs that will provide income streams in retirement. The sooner we start that process, the more we'll likely accumulate. At some point in your life, you're going to have to stop working. When that day comes, wouldn't it be nice to know you've created a way to support yourself without a steady pay check from your 9-to-5 job?
5. Embrace The Ease Of Modern Investing
Gone are the days of complicated Wall Street dealings and exorbitant brokerage fees. Welcome to the era of democratized investing, where anyone with a smartphone can participate in the market. Thanks to online trading platforms like Fidelity and Vanguard, investing has never been more accessible. With just a few taps on your screen, you can buy stocks, bonds, or even cryptocurrencies from the comfort of your home. It's like having a personal stockbroker in your pocket – minus the hefty commissions.
6. Capitalize On Tax Benefits
Elon Musk: three percent. Jeff Bezos: one percent. Warren Buffett: an incredible 0.1 percent.
These are the "true tax rates" calculated by the non-profit U.S. news agency Pro Publica for three of the richest men in the United States. What are they doing differently? They pay capital gains tax instead of the regular income tax. A capital gain occurs when you sell an asset for more than you paid for it. The most important thing to understand is that long-term realized capital gains are subject to a substantially lower tax rate than ordinary income.
Also, there are other ways as an investor; you may reduce your taxable income. You could invest your money into a retirement fund. In 2021, the tax deduction for contributions to a private pension fund in Germany amounts to 92% of the actual contributions.
7. Generate Steady Income
A dividend stock is any stock that pays a dividend. Even if you do not know much about Dividend stocks, just know that a dividend is a share of a company's profits distributed to its shareholders and usually paid quarterly, like a bonus to investors. Depending on the dividend stock you(investor) buy, it could pay you cash ranging from 1% up to 10% (and beyond) of the total money you invest every year.
For example, let's pretend you buy a portfolio of 20 dividend stocks that overall pay a dividend of 4% of your total investment. And let's pretend you've just retired after a long and successful career. Hence, you're comfortable investing 500,000€ of your life savings into this portfolio. Every year, that portfolio of dividend stocks would pay 20,000€ in cash into your account just for owning them (500,000€ investment x 4% annual dividends = 20,000€ per year).
With so many different options, investing for beginners is more straightforward than ever before. No matter how old you are or where you are in life, it's never too late to start investing. The best time to start investing was ten years ago. The second best is now. Like, right now. You can't change what you've already done - or what you haven't - but you can change your future for the better. So, what are you waiting for? Skip that dinner you had planned at that expensive restaurant. Take that money and start investing. Your future self will thank you.
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Disclaimer: The Content is for informational purposes only, you should not construe any such information or other material as legal, tax, investment, financial, or other advice. It is important to do your own analysis before making any investment.
