The Importance of Investing Explained

Investing is important because it can ensure the money you save has earning power in the future. Money loses earning power over time because of inflation. To understand inflation, consider a donut that’s selling for $1 today. In 25 years, assuming an average annual inflation rate of 2.5%, the same donut would cost $1.85. In other words, $1 will only buy you a little more than half of the very same donut in 25 years. Now, consider something more sizeable. If you put $100 under your mattress each month for 25 years, you’d have $30,000 when you’re done. While that’s a decent pot of money, remember our donut. Because of inflation, $30,000 in 25 years won’t buy you 30,000 donuts. It’ll only buy you about half that amount. Because of inflation, to buy 30,000 donuts in 25 years, you’d have to save about $56,000. The solution? Investing that $100 each month in a balanced portfolio and earning a 7% annual rate of return could give you more than $80,000 after the same 25 years. By investing in the market and compounding your earnings for 25 years, you’ve maintained your future buying power and then some. Talk about a lot of donuts!

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