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Financial Literacy

Financial Literacy

Home Finance Investing Why Invest?

Why Invest?

You might have plans for a high-power career, or you might have big dreams to become the first trillion-dollar YouTube artist. Regardless of how you make your briefcases full of money, why should you invest it?

Why Type-A Personalities Invest

Without investing, you're pretty much stuck with the money you earn from your job and whatever change you can dig out from under your car mats. You'll get raises and promotions, but even then, there's a limit to how much you're going to make. (Spoiler alert: you're not going to earn more than your boss.)

And there's another problem with deciding to just focus on earning (and spending, which we know you're really good at) instead of investing: you can only work so much. Even if you can earn $400 an hour at a super cushy job, you'll probably only work 40 to 60 hours a week in a caffeine-fueled fog before you collapse. If your per-hour rate is high, it's not exactly a bad way to make a living—but what happens if you get sick or burnt out or if you just hate your job?

And what happens if you don't land that comfortable job and you're only averaging $20 (or less) an hour? You may not even be able to afford the really fluffy bath towels, let alone that ocean-view condo you've had your eye on.

"I really hope I work longer hours," said no one ever.

By investing, you're creating money so you can enjoy the life you want. You're not limited by what your boss earns, by how long you can go without sleep, or by what your company is willing to pay.

Even Trust Fund Babies Have to Invest

Even if you come into some money, you may not get to live the lifestyle you want.

Let's say your long-lost Uncle Stanley leaves you everything he has…which is a lot because he invested in Apple thinking that they sold Granny Smiths. He leaves you his collection of ceramic apples—and all his stocks.

You may think you have it made, but that money won't take you as far as you think. First of all, the government is going want its share of the, say, $1 million, so you can take about half off the top. That's right: that $1 million fortune will end up at about $500,000. And yes, $500G looks pretty impressive in a briefcase, but will it let you live the way you want?

If you invest the money and try to live off the dividends, you're probably going to get anywhere from $18,000 to $24,000 a year from your $500,000. That's not even enough to rent a nice apartment in some cities. Translation: put away the swim trunks. You're still going to have to work.

Even if you got a part-time job so that you could make a decent wage without having to be a desk jockey, inflation means that your investments and your fortune will be worth even less with time. If you're making $52,000 by having $20,000 from your investments and some sort of part-time job, and your rent goes from $1,500 a month to $2,000 a month, it'll be time to make some decisions…and you won't feel very rich when you're trying to afford rent by living on ramen noodles and Fig Newtons.

Not exactly what you imagined when you flew in to see Uncle Stan's lawyers, huh?

Compound Interest

But what if you took the money you got from your apple-loving uncle and invested it instead? Thanks to compound interest, there's no limit to the money you could earn.

It's a little like what Captain Kirk faces when someone brings tribbles on the Enterprise. A crew member brings on a cute piece of fluff as a pet. The cute, chirping little thing multiplies, and, in a few days, Spock and the rest of the crew are overrun with tribbles.

Compounding works because you're earning interest on interest. You start with a small amount and earn a little bit. When you invest the initial investment plus what you've earned in interested, you earn even more interest because it's on a larger amount. Soon you're making interest on interest and your money is just creating extra money for you. You couldn't stop it even if you wanted to.

But you probably wouldn't want to.

Should You Invest?

Before you invest, you probably want to be debt-free. If you're trying to pay down credit cards and other types of loans while you're trying to grow your money, you'll end up behind because the interest on that credit card debt will be bigger than the interest you're earning on your investments. But once you've paid down most stuff (except for maybe mortgages and car loans, if you have those), you can start making some serious money.

And you don't have to be rich or have an eccentric uncle leave you money (although it helps). If you have $2,000 or more in savings every year, you can start investing.

And the earlier you get started, the more time that money will have to grow.

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