Editor's Note: This story originally appeared on NewRetirement.
Want to get ahead? Saving money is not enough; you also need to invest.
Investing is a vital step towards achieving financial security and reaching your long-term goals.
Why Investing Is so Important
While saving money is important for short-term goals and emergencies, simply keeping all of your money in a savings account may not be sufficient in the long run.
Why? Here are six reasons why investing is the real secret to getting ahead.
1. Investing Is Like Getting an Extra Income Source
When you invest, you are using your money to create extra income. You are putting your money to work. You work for your money; it only makes sense to then make it work for you.
Saving alone does not provide the necessary growth to build significant wealth or accomplish long-term financial objectives. You also need to invest.
2. Without Investing, Inflation Will Erode the Value of Your Savings
Inflation gradually reduces the purchasing power of your savings over time.
Think about it. Let’s say you’ve had $100 in your bank account since last year. Twelve months ago the $100 would have bought you around 35 dozens of eggs. Whereas that same $100 would only buy you around 28 dozen today.
By investing, you have the potential to generate returns that outpace inflation and preserve the value of your money.
3. Investing Offers a Higher Probability of Long-Term Returns Than a Savings Account
The typical savings account offers around a 3%-5% rate of return. The historic average return of the S&P 500, which is a commonly used benchmark for the U.S. stock market, has been around 9%-10% per year over the long term.
The stock market will vary greatly from year to year, but it has always resulted in long-term gains.
Higher gains help you build wealth.
4. Compound Interest Is Almost Magical
Investing allows you to take advantage of the power of compound interest.
Compound interest is the concept of earning interest on both the initial investment amount and the accumulated interest from previous periods, resulting in exponential growth of an investment over time.
The longer your money remains invested, the greater the compounding effect. By starting early and consistently investing, you can exponentially grow your wealth and achieve your financial goals more quickly.
Compound investing can be likened to a snowball rolling downhill, gradually accumulating more snow and increasing in size.
Similarly, as your investment grows through compounding, the larger investment base generates higher returns, which, in turn, leads to even more significant growth. This compounding snowball effect amplifies your investment results as time goes on.
5. Investing Doesn’t Have to Be Complicated
This may surprise you, but you don’t need to be a financial genius to invest successfully. There are simple strategies like investing in index funds that anyone can apply.
6. Investing Will Enable You to Achieve Your Goals Faster and With Greater Ease
Whether you are saving for retirement, to buy a house, or to fund a college education, investing can help you achieve your goals faster and with greater ease.