Five reasons why you should invest your money – not save it

As we often tell our children, it’s wise to save money. But there are some occasions when saving isn’t the most financially astute decision. 

If you’re managing your money with one eye on your future (and if you’re not, why aren’t you?), then savings shouldn’t be your only financial strategy.

Five reasons why you should invest your money – not save it

In fact, if you’re saving for your long term future, savings shouldn’t be your strategy at all. Here are five reasons why.

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1) If you stick to cash you’ll lose money to inflation

If you save up over many years, you won’t earn enough interest to cover the increasing cost of living. When your cash fails to keep up with inflation, it loses relative value and you’ll have less buying power.

In fact, you’ll have to add more to your cash balances to make up for the lost value vs inflation, so holding too much cash is costly.

Investments, on the other hand, can be index-linked to inflation or have a reasonable relationship to inflation where it outstrips it during most years – preventing your assets from declining in value as the years roll on.

2) Investments can give you a liveable income

Some investments can give you 4-6% in income, which is high enough to live off once you have a large enough portfolio balance. In contrast, savings pay little in interest and you cannot live off that income stream; it’s just too small.

Depending on the investment, it can grow and still pay out a solid income, such as property investments, where your income comes from the net yield after operating expenses and fees.

This gives you the best of both worlds. And when you have enough liveable income you become financially free, whether you choose to retire or continue growing your wealth while still working.

3) You can use the ‘magic’ of compounding to grow the value of your investments

As an owner, you benefit from the growth in the value of your investments. You can invest in different value-based opportunities around the world while using financial hedging advice from companies like JCRA to protect from a currency depreciation.

If you invest over 10-20 years, the ‘magic’ of compounding becomes a significant factor in building your investment capital. You can end up with double or more compared to what you originally invested if you begin early enough.

4) You can diversity your holdings for safety

If you own property, you need to purchase other investments to get a balance. Being too overloaded in property or cash can cause issues if it all declines in value at the same time, or earns next to nothing.

By using diversification, you can smooth out variable returns because investments in one asset class that year might perform exceptionally well, which balances out a decline in another asset class.

Regular rebalancing by selling off richly priced investments and buying more of cheaply priced ones provides a rebalancing bonus that can be as much as half a percent, just by systematically buying low and selling high (most investors do the opposite because they’re being led by their emotions).

5) Your savings alone won’t be enough to retire

If your income isn’t stratospherically high, you need your savings to grow substantially to save more than you require to retire.

The interest from cash savings loses money to inflation, so that won’t work. Instead, you need to deploy your savings into investments to multiple their value. If you don’t, you may never be able to afford to retire. So if you stick with cash because you’re scared of the stock market, you could just be sabotaging yourself.

There’s a time for saving – but your future isn’t it

Saving is important. It buys time when things go wrong, gives you a buffer for any unexpected expenses and has a useful sleep-at-night factor that’s not to be discounted.

However, you can’t usually hang your entire financial future on your savings. If you have enough freely available cash, it’s much wiser to invest it with a long term eye on your future. Your future you will thank you for it!

Photo by Charisse Kenion