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Investing

Why You Should Be Investing

I’m not saying that you should be investing right now (because there’s a lot of uncertainty, and that’s a personal decision you have to make), but I firmly believe that you should be investing. No, I’ll rephrase that to be more emphatic – you need to be investing.

Here’s what your finances will look like after 40 years of working, without investing. Let’s assume that you start off at 20 years old, you have $5,000 and you get a job that allows you to save $1,000. After a year you get a pay rise and save $2,000, after a few more years you’re saving $3,000, then $4,000… up to when you’re 36 years old and saving $20,000 a year. You don’t get any interest on your savings because you put your money in the bank. You get set back a bit at age 30 because you bought a house, which also reduces the amount you can save.

AgeValue of SavingsAnnual Savings from Job
20$5,0001000
21$60002000
22$80003000
23$11,0003000
24$14,0005000
25$19,0005000
26$24,0006000
27$30,0006000
28$36,0008000
29$44,0008000
30$05000
31$5,0005000
32$10,00010000
33$20,00010000
34$30,00015000
35$45,00015000
36$60,00020000
37$80,00020000
38$100,00020000
39$120,00020000
40$140,00020000
41$160,00020000
42$180,00020000
43$200,00020000
44$220,00020000
45$240,00020000
46$260,00020000
47$280,00020000
48$300,00020000
49$320,00020000
50$340,00020000
51$360,00020000
52$380,00020000
53$400,00020000
54$420,00020000
55$440,00020000
56$460,00020000
57$480,00020000
58$500,00020000
59$520,00020000
60$540,00020000
Financial model of a person who’s an aggressive saver, but doesn’t invest.

This person ended up at age 60 with the equivalent of just over $0.5m and is mortgage free. Sounds good? Well, not really because that’s not enough to retire on at age 60. That half a million has to last another 20-30 years, and will be eroded away by inflation. Even without inflation, that $0.5m is only $25k a year over 20 years, or $16.5k over 30 years. Sure, it’s a nice boost to the pension (assuming there is such a thing in the future – there probably will be), but in this model you’re relying on the government looking after you. You have not saved enough to be certain of your own future without welfare.

Also, consider how much you have saved compared to this model for someone your age. How does your position look right now? Are you saving that much power year? Have you saved that much to date? Do you own a home with a mortgage that will be paid off before retirement at the current rate?

Now lets consider the same person, but who has invested in the stock market. Lets assume a 14% return (which is the average return of the NZX per year), minus 3% for inflation, dropping us down to an 11% Return On Investment (ROI).

AgeValue of SavingsAnnual Savings from Job
20$5,000.001000
21$6,550.002000
22$9,270.503000
23$13,290.263000
24$17,752.185000
25$24,704.925000
26$32,422.466000
27$41,988.946000
28$52,607.728000
29$66,394.578000
30$0.005000
31$5,000.005000
32$10,550.0010000
33$21,710.5010000
34$34,098.6615000
35$52,849.5115000
36$73,662.9520000
37$101,765.8820000
38$132,960.1220000
39$167,585.7420000
40$206,020.1720000
41$248,682.3920000
42$296,037.4520000
43$348,601.5720000
44$406,947.7420000
45$471,711.9920000
46$543,600.3120000
47$623,396.3520000
48$711,969.9520000
49$810,286.6420000
50$919,418.1720000
51$1,040,554.1720000
52$1,175,015.1320000
53$1,324,266.7920000
54$1,489,936.1420000
55$1,673,829.1120000
56$1,877,950.3220000
57$2,104,524.8520000
58$2,356,022.5920000
59$2,635,185.0720000
60$2,945,055.4320000
An aggressive saver who invests all their savings

The stark difference barely needs commentary. You can see that not only has the investor managed to save a $66k deposit, verses the saver who saved $44k (buying a much smaller house), the investor has accumulated nearly $3m by age 60 vs the saver who has only $0.5m.

The saver has lived the same live, but retires at an old age and relies on his pension to survive, while the investor is a multi millionaire, probably retired early, probably saved less and spent the money on life instead of just banking it.

So in summary, I ask you once again to look at your own bank account and see how much you save a year, then ask yourself whether you can afford not to invest. Because, personally, I can’t.

You need to be investing.

Lewis Hurst

If you are interested in learning to invest, I invite you to take a look at this tutorial and subscribe to my website for more information. Certainly you’ll need to do more research that this, and it won’t be an easy road, but you have to do it.

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