Few things can provide as many financial benefits as investing money for the future. Relatively few people will be able to retire comfortably without having some investments stashed away. These might be in an employer’s pension plan, or they might be in a retirement account like a 401(k) or an IRA. While it’s a good idea to have some money set aside for emergency savings, it’s imperative to invest money.
Higher returns make up the biggest reason it’s important to invest money in stocks, bonds, or real estate. Regular savings accounts at a community bank will do well to get a 1% interest rate. A certificate of deposit will get only slightly more. Additionally, a CD will lock up money for months or years, and early withdrawal will incur a penalty. Investments will tend to pay more. Many REITs pay out dividend yields of 5% or more. Dividend-paying stocks that are relatively safe will pay anywhere between 1% and 5% while also providing capital gains. Investing in mutual funds allows investors to diversify automatically, and the stock market has returned around 10% over the long haul.
Over the past few decades, inflation has clocked in at around 2% on average. Putting money into a savings account will actually lead to a loss of purchasing power because of inflation. This is why the higher returns that come with stocks and bonds are an important key to financial success.
Another benefit of having some investing accounts is the ability to achieve a higher level of tax efficiency. Putting money into a 401(k) or an IRA allows that money to grow on a tax-deferred basis. Any dividends and capital gains are automatically reinvested. Over a period of years or decades, this can be a massive benefit. Roth accounts allow for tax-free withdrawals as well. Additionally, dividend income receives specialized tax treatment from the IRS. The same goes for long-term capital gains.
Investments are a very important component of long-term financial success. From the ability to achieve long-term growth that exceeds the returns offered by savings accounts to the ability to save on taxes, investing money can pay off more than simply saving it.