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Reasons to invest: Young Americans are less likely to invest in the stock market.
Disclaimer: I am not a certified financial professional.  All articles and posts are opinions expressed by me, a contributor to the Common Cents Finance platform.  The information provided is not a research report or financial advice.  It should not be used as the basis to buy or sell a security, nor is it an offer to buy or sell a security.  This article generates revenue through affiliate commission at no cost to you.

Since the 2008 Great Recession, young adults have stopped investing at an alarming rate. As of 2018, only 37% of people under the age of thirty-five were investing; this percentage was as high as 52% before the crash. Not investing as a young adult is a missed opportunity to secure your financial future, especially with the current state of the economy. People want to live lavishly in the future but are not willing to take the necessary steps. Here are five reasons why you should start investing now.

1. Have Your Money Work for You

Many individuals work very hard for their money. They go to their job, spend around eight hours working, then go home to prepare to repeat the cycle the next day. This is considered active income, income earned through physical activity.

Active income is not the only way to earn money (nor is it the ideal way); there is also passive income, which does not require physical labor. An example of this would be receiving rental income from a property. You would not have to exchange your time for money. Instead, your investment is earning the money on its own.

Passive income makes your money work for you and not the other way around. After some time, your passive income can be so significant that you might not have to work as much as you once did. Your passive income can surpass your active income, which could provide you with financial freedom.

Investing in the stock market is a form of passive income. Returns on stock gains and dividend payments are income sources with no physical work required. The best part is that this is simple to start, which makes it an incredible reason to start looking at investing now. Many platforms, such as Robinhood, allow investors to invest in stocks for as little as $1.

2. Money Loses Value Over Time

Do not just have your money sitting in a safe, collecting dust.

With every day that passes, your precious money goes down in value. That $1,000 that you have stored under your mattress will not be the same $1,000 in a couple of years. You would have less buying power, due to the fact that prices rise. This is referred to as the time value of money (TVM).

This is due in part to inflation, the rate at which the prices of goods increase. The forecasted inflation rate for the United States for the next three years is around 2%. This means that the value of the dollar will decrease in buying power by about 2% every year for the next three years.

Investing in the stock market ensures that your money does not lose value over time. In fact, it is almost a guarantee that your money will grow in the long-term if held in stocks.

So, the longer you wait to start, the less your money will be worth. Increasing the value of your money and beating inflation are great reasons to start investing now.

3. Saving is Not Enough

One might think a savings account is a good way to beat inflation and see some return on investment. This is simply not true.

According to CNN.com, the average annual return for a savings account is 0.06%. So, for every year in a savings account, your deposit will grow less than one-tenth of a percent. To better picture, if you had $10,000 deposited in a savings account, you would gain $6 in interest for the year.

According to Investopedia, the average annual return from the S&P 500 is around 8%. This return is over 133 times greater than the average interest from a savings account. If you had invested that $10,000 instead of putting it in a savings account, you would have realized $800 in gains. Without including dividend payments, this would be a difference of over $730 annually.

Some banks have been offering higher interest rates, all north of 2%. However, if a bank offers a 2.5% interest rate and the inflation rate is 2%, the real return is actually only 0.5% (2.5%-2.0%), which is still very small. Savings accounts can be very good supplements for investing, especially for creating an emergency fund, but it should never be used as a replacement.

In investing, there is no ceiling on possible returns, while savings accounts fix the return at a predetermined rate. With the stock market, an investor chooses where their money goes to optimize their returns, which will be much higher than the average 0.06% return if done correctly.

Do not let a savings account be one of the reasons why you do not start investing. Invest now, and do not rely on a savings account for gains.

4. Compound Interest is the 8th Wonder of the World

One of the reasons to start investing now is compound interest. Before I go any further, here is a perspective on the subject from a pretty intelligent individual.

Compound interest is the eighth wonder of the world. He who understands it, earns it; he who doesn’t, pays it.

Albert Einstein
A Pretty Smart Guy

Yes, Albert Einstein, the theoretical physicist with an IQ of over 160, described compound interest as the eighth wonder of the world, and he was absolutely correct.

Compound interest is the key to amassing a fortune. This is when you collect interest on your principal, reinvest your interest, collect even more interest, and then just keep repeating this process. Doing so will lead to tremendous wealth down the line. To calculate the future value of an investment using compound interest, use a compound interest calculator.

This is where dividend reinvesting can be very beneficial. If you were to receive a 3% return on a $1,000 investment, your dividend income will be $30. If you were to reinvest this $30 over ten years and have an average return of 7%, your $1,000 would turn into over $2,400! That becomes a 140% return over the ten years. The craziest part is that this is not counting any other investments made.

Future value with only dividends reinvested.

If you were to invest an additional $500 ($530 total), your investments would be worth over $9,800! This would be close to a 900% increase from the original investment, which is insane to think about.

Future value with dividends reinvested plus additional investments.

Where else can you get a 900% return on investment? Nowhere I know that is legal. The earlier that you start this journey, the more you will benefit from compound interest. So, start your path to wealth by investing now!

5. You Have to Be in It to Win It

For those who do not fully understand the market, there might be some fear in investing. Between the amount of money at play and the perceived complexity of the market, one may be apprehensive to even to start.

There is absolutely nothing to fear. Stocks do not just lose all of their value in a single night, nor do they double in value. With a basic understanding of a company, one can make an educated judgment on whether or not to invest.

With this in mind, you have to be in the stock market to reap the rewards. An example of this is when Apple co-founder Ronald Wayne sold his 10% in the company in 1976 for $800. That 10% is now worth around $90,000,000,000, or 112,499,999 times the original investment. Because he sold his stake in Apple so early, he was unable to benefit from the company’s long-term success.

Stocks are also a long-term game, and you have to be patient and stay in the market to succeed. Being invested in a safer stock, like Coca-Cola ($KO), or an index fund would only provide positive returns over the long-term. Pulling out too early or not investing at all due to fear will cause you to never see positive returns in the market.

You need to be in it to win it, and the only way to create a secure financial future for yourself is to get in it now!

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Post Author: Anthony Crincoli

Anthony is the Founder and Lead Content Creator for Common Cents Finance. Away from the platform, Anthony is a CPA Candidate and an auditor for a Big Four public accounting firm. He has a passion for personal finance and looks to promote financial literacy whenever and however he can.

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