3 Reasons Why Growing Your Money is More Important Than Ever Before

With rising price of goods, and inflation at an all-time high, it helps to be prudent with your spending. I’m sure most have heard of the benefits of investing, but why do some still refuse to?

The number one reason why people don’t invest is that they fear losing money. Not investing your wealth has its unseen cost. You may not notice it, but over time, your cash is losing its purchasing power to inflation.

1. Save for your future self

Visualise an older version of yourself.

Studies have shown that individuals who saw older versions of themselves allocated about 2% more of their pay (on average) to retirement. Seeing a realistic older version of yourself may be helpful in encouraging long-term investing behaviour.

Those who cited retirement as a savings motive regularly saved more than those who didn’t.

Other financial goals like saving for your children, saving for a vacation, or saving for a home did not improve saving behaviour. Saving for retirement did.

2. Protect your wealth against inflation

With 2% annual inflation, a currency’s purchasing power will be cut in half within the span of 35 years. With an inflation rate of 5% annually, our purchasing power is halved every 14 years.

The prices of everyday goods should double every 2 to 3 decades, under modest levels of inflation. This will be far quicker when inflation rate is higher.

From Jan 1926 to the end of 2020, $1 would have needed to grow to $15 to keep up with inflation.

Would investing in U.S Treasury bonds or U.S stocks keep up over this time period?

If you had invested $1 in long-term U.S Treasury bonds in 1926, it would have grown to $200 (13 times greater than inflation) by the end of 2020.

If you had invested $1 in a broad basket of U.S stocks in 1926, it would have grown to $10,937 (729 times greater than inflation) over the same time period.

3. Replace your human capital with financial capital

No one can work forever. Eventually, you may either want to stop working, or your body will not allow you to.

What is your financial capital worth today?

If you expect to earn $50,000 a year for the next 40 years, your total future earnings would be $2 million. Assuming a 3% discount rate, your future earnings have a present value of about $1.2 million today. This implies your human capital is worth $1.2 million.

If you invested that $1.2 million today while it earned 3% per year, you would be able to withdraw $50,000 a year over the next 40 years before running out of money.

By investing your money, you are rebuilding yourself as a financial asset. This financial asset can provide you with income once you are no longer employed. After you stop working your 9 to 5, your money can keep working for you.

This explains why some professional athletes end up bankrupt despite making millions. They didn’t convert their human capital to financial capital.

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