Why should I invest?

I have talked a fair bit about investing here. Lets talk about the basics today.

Why should I invest? Why should I not spend everything and have a good time?

Look at the formula below:

A = P × (1 + R)N

where A = money after a given time, P = principal investment, R = annualized rate of return, and N = number of years invested

The amount of money you get after a period of time depends upon three factors:

Principal: Amount that you put in. This is within your control. It is money you have after spending. If you put in more money-i.e if you save more, you will get more.

Rate of return: This is the rate of growth of the investment. This is not within your control. But you have control over the type of asset you invest in. Stocks, bonds, cash, gold, property, etc. Remember to invest in true and tried asset classes. Make sure you are paying too much as that will affect the rate of return you get. The rule of 72 is a handy thing to remember.

Rule of 72: Time taken for your money to double= 72/rate of return. So if the rate of return in 10% you will double your money in 7.2 years.

Number of years invested: The greater the number of years invested, the greater the return provided the return is a positive number. This is again within our control. Buy and hold and rebalancing of asset classes are key things here.

So if you spend less, save more and invest it in something for a long period of time that gives you a positive return you will make a decent amount of money. This money can then be spent for worthwhile causes: education, marriage, starting a business, retirement, charity or handing it over to the next generation or any other worthwhile cause.

That is the reason you should invest.


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