Once you get paid, do you spend all your money? Do you put the extra in a savings account or under a mattress? If you’re not investing—and your high-interest debt is paid off, you’re taking a big risk with your financial future and missing out on (basically) free money. Here are 7 reasons why you should be investing:

Savings aren’t enough to live on in retirement

Let’s do some basic math to illustrate this concept. If you make $100,000 per year, and you’re like the average American who saves just 9% of their income, your yearly savings is $9000. Again, to use simple numbers, let’s say you work from age 25-65, that’s 40 years of savings netting you $360,000. Then, if you live another 20 years in retirement, you’ll only have $18,000 per year to live on. Yes, you may get social security, but by the time we retire, there might not be much of that either.

Can you imagine the impact on your lifestyle if, when you retire, you can only live on $73,000 LESS per year? What would it be like to live on only $18,000 per year even if your house were paid off?

With inflation, especially as it is now in the 8% range, that means you would have even less spending power in retirement because your money will be worth less than when you earned it. (More on inflation some other time.) Investing is a faster way to ensure sufficient funds for retirement than savings alone - that’s the power of compound interest.

Note: When I refer to “investing,” I may be referring to it in the most general sense of investing in anything that can provide a return on your money, or I may be referring to investing in the equity portion of the stock market. The reason I lump these together is because investing in the stock market is arguably the most accessible means of investing and requires the least amount of money to get started, and generally still provides good returns. If I’m referring to a specific type of investment, such as real estate / REITs, bonds, directly in private companies (such as Angel Investing), or other types of investing, I’ll identify them.

Savings alone don’t support big financial goals

Unless you’re reaching the highest end of the savings rate (>20-30%), you probably also don’t have enough money saved for big financial events. The average US salary is $54,000, so if you’re a super saver, saving 18% of your income, you’d amass $9,720 in savings each year. Given the average savings rate is about half that, most people would struggle to save enough to pay for big financial events.

What’s on your bucket list of financial dreams? Have you calculated how much they’d cost?

Some big financial commitments may include paying for your own wedding (average of $28,000), sending your kids to college debt-free ($102K per kid for 4 years), traveling the world (or surviving a job loss) for 6-12 months, helping your parents financially during their retirement, or even retiring early yourself.

Investing is largely passive money growth

Over the last 50 years, the stock market has averaged returns of 11% per year (source). That’s 11% compound annual growth, meaning the money you invested grows, and the money earned from investing grows too. Check out this excerpt from the link above regarding investing in the US stock market:

For example, USD 1 invested in January 1970 grew to USD $234.54 by December 2021, generating an 11.1% compound annual return. And in the past, when looking at the big picture, every crisis has been eclipsed by long-term growth.

That $1 grew completely hands-off: no trading time for money, no backbreaking labor, no buying and selling every week. While past performance is not an indicator of future performance, you can start to see the power of compound interest, and $1 is a small and totally doable initial investment.

Normally, a savings account returns 0.5% per year. Compared to 11% in the stock market, that’s a huge difference overtime—on the order of thousands of dollars, maybe hundreds of thousands, or even million(s) of dollars over your lifetime (depending on how much you’re able to contribute).

But, what about a high-yield savings account (HYSA)? Right now, with both interest rates and inflation as high as they are, HYSA are still only giving you a 2-3% return on your money. By the way, that’s less than inflation. So each month that your money sits in a HYSA account, you are losing spending power. Having a savings account is still important, just don’t put ALL your money there.

Once you put your money into the stock market, and buy an investment, such as an index fund, it becomes passive money growth.

Growing your money can increase your sense of security

Pause for a moment and imagine two scenarios, both started at the same time with $10,000.

• Scenario 1 - By the end year 1, you’ve received just shy of $50 in interest deposited to your added. That 0.5% yield continues indefinitely. So, in 10 years, you’ll have $10,511.40.

• Scenario 2 - At the end of year 1, assuming average performance, you have $10,749. Assuming average returns on investing, in 10 years you’ll have $28,394.21.

There will likely be ups and downs, better and worse years, but based on average performance, you have more money after the first year with investing than after 10 years in a checking account. To emphasize: in scenario #2, you have more money at the end of one year than after 10 years in scenario #1.

Which one gives you a greater sense of security and safety?

Even with some variability and occasional volatility, if you stay committed to the long-term, your money will continue to grow in an investment account. That makes the second scenario a lot more comforting when looking at a longer horizon.

More money tends to make people feel more secure, especially if that money is expected to keep growing. To repeat, there are more risks with the second option. While in this scenario you have more money at the end of the year than at the beginning, that may not always be the case. But, by looking at the returns of the market over the last 50 years and the power of compound interest, focusing on the long-term and continuing to grow your money effortlessly is likely to provide you the most safety and security.

Financial Independence Retire Early (FIRE)

You may have heard of the FIRE movement, whereby people want to achieve financial independence (from their jobs, debt, etc) so they can retire early or have work be optional. If this appeals to you, investing is fundamental. Yes, saving more and spending less are also a big part of the effort; but, as we discussed above, you can’t save your way to a comfortable retirement. Especially if you want to retire early, you have to grow your net worth through investing (or possibly a very lucrative side hustle or selling a business you started or…).

Close the wealth gap

Yet another reason to invest is to close the economic gap that currently exists in which women and people of color hold less wealth than white men. Women and POC are also less likely to own stocks than white men. To build wealth, financial literacy and good money habits are key, and investing is a part of that.

Even if you don’t think you could make any difference in the wealth gap, you can start learning financial literacy and investing now. Just having those skills is a huge advantage and you can teach them to your children, thus passing on more money and knowledge to them.

With more money, you can also also invest in or contribute to closing the wealth gap. For example, you could invest in female entrepreneurs, fund businesses founded by people of color, or donate to non-profits that teach financial literacy and help people get out of debt.

Have a voice

When you invest in equities, then you’ve become a shareholder—and part owner—of a company. If you invest in stocks or directly in private companies, you can vote on company issues and have your voice heard by those companies. You can participate in shareholder meetings or contribute to shareholder proposals. For example, a hot topic in shareholder elections this last year has been executive pay, meaning how much the CEO is compensated and you can vote against astronomical pay packages for CEOs, if that’s an issue you care about. Other topics that have come up on shareholder elections are commitments to Net Zero goals to address climate change, ensuring diverse board members, and reviewing working conditions along the supply chain. What’s important to you?

Also, in our society and economic system, having more money means more power and influence. Having your own money can help you to create the change you want to see in the world.

With so many reasons to invest, you may be jumping to get started. However, it is important to get your financial house in order first, namely addressing any high-interest debt, like credit card debt. Look for an upcoming post for tips to ensure you’re ready to get started investing.