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Investing can be an effective way of growing wealth over the long-term, however, unlike holding money as cash, investments carry the risk of falling in value as well as rising. So, given the inherent risk, why invest? Why is investing important? In this article, we will explain.

why invest

What Is Investing?

Investing generally involves putting capital to work by purchasing assets, with the expectation of generating an income or a profit from those assets in the future.

Investing vs Saving

Before we dive into looking at why we should invest, it is important to draw a distinction between saving and investing. Both involve putting money away for the future, and both are very important, but each activity serves a different purpose.

Saving involves holding money as cash or cash equivalents – most typically in the form of a deposit with a bank. Holding money in this way means savers have ready access to their cash when needed, and they take on next to no risk of losing their hard earned money. However, in return for easy access and low risk, their cash generates very low, or no, returns.

On the other hand, investing entails using money to make more money or to generate a regular income. Money which is invested is not as readily accessible as savings and it carries a significant risk of being partially or totally lost. However, in return for the lower liquidity and increased risk, investing has the potential to generate far higher returns.

Why Saving Is Important Too

In the following section, we will look in detail at why investing is important. Nevertheless, it is worth pointing out at this stage, that saving is also important. In fact, before you even think about investing, it is important to create an emergency fund of savings.

You should always prioritise having readily available cash on hand to support yourself in case of any unexpected circumstances. The reasons for this are simple, as already mentioned, money invested is not only less accessible than savings, but it is also at risk of being lost.

Why Invest?

So, given the risk, why invest? Investing is important for a number of reasons, several of which we will examine in the following sections.

Grow Your Wealth

When it comes to investing, everyone will have a different reason or end goal. Some may be investing for retirement, others for their first home. However, regardless of the ultimate reason for investing, the general aim remains the same, people invest to grow their wealth.

As mentioned before, money left in the bank generates very little, and sometimes no, returns from interest payments. On the other hand, investing allows you to potentially grow your wealth over time with particular help from the compounding effect, which can greatly magnify returns in the long term.

Compounding refers to the process by which the returns generated by an asset are reinvested in that asset to generate further returns in the future. Therefore, compounding, sometimes referred to as “interest on interest”, means investors are able to generate returns from their initial investment as well as the returns they have amassed up to that point in time.

Retirement and Future Financial Security

Presumably, at some point, you plan to stop working and to retire. But in order to do so, you will need to have access to a fairly large amount of money to sustain yourself when you no longer work.

Achieving financial security for later years is one of the main reasons, if not the main reason, why people invest. In fact, many people reading this will already be investing for their retirement, whether they realise it or not.

Many countries offer a state pension, which is funded by tax contributions collected throughout your working life. Furthermore, if you have paid into a private or a workplace pension, this money is being invested in the financial markets by your pension provider, with the aim of growing your pension pot before your retirement.

Beating Inflation

Whilst different people may have different reasons for investing, there is something which affects us all, and which has been particularly prevalent in the news recently. Inflation.

Inflation measures the rate at which prices are rising in an economy over a period of time. Another way of interpreting this statement is that inflation measures the rate at which money is losing its purchasing power.

Although we only tend to hear about inflation when it gets too high, the reality is that it is usually present, with policy makers specifically targeting a low, stable rate of inflation of around 2%. But what does that mean for your money?

If annual inflation is 2% then your money will lose 2% of its purchasing power over the course of the year. Whilst this may not sound like a great deal, it adds up over time.

So, in order to just preserve your money’s purchasing power, it needs to be growing at the same rate as inflation each year. Savings accounts usually pay interest on deposits, however, the rates are rarely sufficient to outpace or even match inflation. A well-diversified investment portfolio represents one of the only methods of potentially offsetting inflation and growing your wealth over time.

How Much Money Do You Need to Start Investing?

One of things which can often discourage would be investors from starting to invest is the misconception that they need a lot of money to get started. After all, most people don’t have several thousands of spare pounds lying around to create an investment portfolio.

However, today, investing is more accessible than it has ever been. Many brokerages offer the ability to start investing with low deposits and low commissions. Furthermore, the increasing availability of fractional shares means that, with brokers such as Admirals, you can start investing in the stock market with as little as €1.

How to Start Investing

Now you know why to invest, you may be interested in how to start investing. The first step is to choose a brokerage in order to access the financial markets.

At Admirals, we offer the ability to invest in over 4,500 stocks and more than 200 Exchange-Traded Funds (ETFs). Other benefits of investing with Admirals include:

  • Open an account with a minimum deposit of €1
  • Competitive commissions and no account maintenance fees
  • The ability to buy fractional shares in some of the world’s top companies

In order to open an account and start investing, click the banner below to register today:

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This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Please note that such trading analysis is not a reliable indicator for any current or future performance, as circumstances may change over time. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.