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5 Reasons Why Investing Is Critical

There is the temptation in life to blow through every dollar as soon as it hits your bank account. Disciplining yourself to squirrel money away doesn’t sound like much fun, but it will pay off in the long run. Here are five reasons why investing money rather than spending it is a good idea.

1) Retirement

Saving for Retirement ID-100426079With recent medical advancements, the average life expectancy in the U.S. has gone from 46.3 for a man and 48.3 for a woman in 1900, to nearly 80 now. The number of people reaching retirement age is higher than ever. According to U.S. News, “there are just over 40 million Americans age 65 and older, and they make up 13 percent of the population. By 2030, when all the baby boomers will have passed age 65, the over-65 crowd will reach 20 percent of the population.”

So, unlike in previous generations, the odds are that unless you partake in high risk activities, you’ll probably live to a ripe old age. And financial planners tell us that in order to be sure you don’t outlive your money, you need to plan to live to at least 80 or 90. But with current longevity research progress it is possible that you could even live to be 120 or more. This makes investing for your future even more critical.

Perhaps, if you had no heirs and you knew for sure that you were only going to live to 40 and then die instantly without needing any hospitalization, it might make sense to enjoy every penny now. But living until 90 or more, while providing for a family, totally changes the equation. After all, there is nothing more depressing than the prospect of a retirement filled with worry about how you will pay your next food or electric bill.

2) Build Wealth

Small investments that are made over time can really add up to a sizable sum over a period of decades. For example, an individual who is able to save just a dollar a day between the ages of 15 and 65 will be able to see a nest egg built to about $286,000 if they get an 8 percent return on average. Most of us waste much more than a dollar a day.  Imagine what is possible if you really put your mind to it.

Your “Net Worth” is a much better indicator of how wealthy you are than your income. You could be earning $150,000 a year but if you are spending $160,000/yr. you are worse off than someone who is earning $50,000/yr. and spending $49,000/yr. To calculate your net worth you take everything you own and subtract everything you owe. So if you have a $200,000 house, a car worth $20,000, $2,000 in the bank and $5,000 in your IRA. Then you have $227,000 in assets. Then if you have a $150,000 mortgage, and a $18,000 car loan, and $2,000 in credit card debt you have $170,000 in liabilities. $227,000 minus $170,000 means you have a net worth of $57,000.

According to the U.S. Census bureau in 2011 (the most recent numbers available)  18.1% of U.S. households had a net worth of Zero or Negative… meaning they actually owed more than they owned! No retirement for them.

Another almost 18% (17.9%) had a net worth of $100,000 to $249,999. Now if you are in the first group it may sound like the second group is “well off” but this group had an average of $100,000 in equity in their home (which you can’t easily spend). So at best they had $150,000 in liquid assets (assets they can actually spend) and they only had about $59,000 in their retirement plan. How long do you think you can live on $59,000? One or maybe two years? Not much of a retirement is it? Even if they only spent $25,000 per year of their assets (in addition to their $15,000 of Social Security) and then took out a home equity loan after their $59k was gone, they would only last a little over six years before they are reduced to living on only Social Security.

 HOUSEHOLD NET WORTH  % of U.S. Population
 Negative or zero 18.1%
 $1 to $4,999 9.1%
 $5,000 to $9,999 4.8%
 $10,000 to $24,999 6.6%
 $25,000 to $49,999 6.9%
 $50,000 to $99,999 10.4%
 $100,000 to $249,999 17.9%
 $250,000 to $499,999 12.6%
 $500,000 and over 13.5%

As you can see in the above table only 13.5% of the population had a Net Worth of over $500,000. This group has an average of $113,000 in an IRA or KEOGH plus $150,000 in a 401k or Thrift Savings Plan. So even the top group only has roughly $263,000 set aside for retirement. Since their expenses are probably higher, say $75,000 per year and they will probably get a bit more in Social Security, their retirement won’t last much longer than those in the other group.

3) But It’s Never Been Easier

There is literally a plethora of options when it comes to investing money so there is no excuse for not saving for your retirement other than lack of willpower. There are online brokerages that can allow do-it-yourself investors to buy individual stocks, bonds, or mutual funds with a few clicks on a computer mouse or tablet. Those who would rather get a bit of assistance with the process can look to local sources, such as Deseret First Credit Union, to get help you manage your money as effectively as possible. Unfortunately, we are bombarded constantly with sales pitches telling us “You deserve it”, “Spend now”, “Enjoy Life”, but if you are going to enjoy retirement you need to learn to ignore these messages and get down to saving.

4) A Rainy Day

Catastrophes will happen in just about any family, given enough time. Be it a lost job or a blown motor, it’s likely that you’ll have to shell out more money than you have coming in at some point. Saving up for an emergency through an investment account can help you weather the storms that are probably going to come up, even if the account happens to be a money market account.

5) You’ll Sleep Better At Night

Building wealth and having a nice emergency fund built up will give you peace of mind and allow you to have a bit of fun in your retirement years rather than worrying about where your next meal will come from. With a big enough nest egg you could even tour the world for a few months a year. A nice nest egg can help you avoid the stress of not knowing if you’ll be able to handle a layoff or provide a buffer should you need a new car and it will definitely let you sleep better at night.

The only way to really build wealth is through regular investment. It’s not likely to be a quick road. However, it’s a road that’s been proven to work over the long term.

Image courtesy of Sira Anamwong at FreeDigitalPhotos.net