1. Beat Bank Account Interest
At the time of writing, the Reserve Bank of Australia (RBA) cash rate is currently sitting at 0.10%. This means it is extremely cheap for banks to borrow money, and they have passed this cheap rate on to mortgages. Mortgages are at an all time low also, and while this is great for home owners, it isn’t great for those with savings in the bank. Cheap money for banks means they pass on low savings interest rates, which are currently all around 1%. Inflation is also sitting around 1%, which means your money isn’t growing at all as it is not beating inflation.
A way to overcome this is to invest! The stock market does not rely on the RBA for its returns, instead the returns are made by mostly large, well performing companies. Investing in these reliable, strong companies means not only can you beat the banks and beat inflation, but your money can continue to grow every year.
Examples of companies you can invest in:
2. Grow Your Money
Ever heard of Compound interest? Some say it is the eighth wonder of the world. Investing allows you to use this compound interest to your advantage and rapidly grow your money. Compound interest is the interest that is calculated on the initial, principle amount and the interest you have already earned. In other words, you get interest on your interest, which means compound interest can exponentially increase your savings.
For example, if you had $10,000 in your investment account gaining 10% interest per year, at the end of the year you would have $11,000. If this money again earned 10% it would be based on the new number $11k, therefore at the end of the second year you would have $12,100 and so on. Here are some investing examples from the Money Smart Compound Interest Calculator to show you how powerful compound interest can be over time.
If you started with $1000 in your bank, adding $100/week with 1% interest per annum:
If you started with $1000 in your investment account, adding $100/week with 8% interest per annum:
What if we were to continue this same savings rate of $100 a week with an interest rate of 8% but over forty years?
As you can see by the graphs, the more time compounding has to work, the more powerful it becomes. The last graph demonstrates that consistency is one of the most important parts of investing and will help you grow your wealth exponentially if you stick with it over the long term.
3. Speed Up Your Savings for a Long Term Goal
Have a goal of buying a house in ten years time or longer? Investing may be a way to dramatically increase your deposit. With an average return of 8% per annum, investing in the Australian share market could really help grow your savings, faster than any term deposit could.
Using the Money Smart Compound Interest Calculator can help to show you how much your deposit could grow by if invested. If you left your $50k deposit in the bank for ten years at an interest rate of 1%, you would have approximately $55k at the end of the 10 years. If you left your $50k deposit in an investment fund for 10 years that grew at 8% per annum, you would have approximately $110k saved! Both of these is without contributing any extra money to that initial deposit.
I’ve attached a link to the calculator at the bottom of the page, feel free to have a play around and see how much you could earn. Keep in mind that this should only be if planning to use your investment in ten years time or later, as investing should be for the long term.
4. Provide an Additional Income Stream
Another great reason why you should invest is that it can provide you with a passive income, meaning you can be getting paid while you sleep!
Many companies distribute “dividends” which is a payment made by the company to you, the investor. These can come quarterly, half yearly or yearly and provide a great additional income stream. If you have heard the term “self funded retiree” before, this is who they are referring to. Self funded retirees will invest in assets that pay high dividends, and they then use those payments to live. You can also do a similar thing with property investing, and support yourself using the rent people pay you. The more you build up these assets, the larger the income will become. If your asset base is high enough, you would be able to fully fund your lifestyle, without a job. This leads to the next point..
5. Retire Early
If you can build up a passive income large enough to cover your expenses, you can retire! And you can retire without needing to access your super, which means it will be before you are in your mid to late sixties, giving you time to do what you like. Whether that’s relaxing, travelling, or even still working but doing something you love and not something that pays well. This passive income opens up a range of doors and offers you freedom.
There is a financial movement out there called FIRE (Financial Independence Retire Early) who work hard early to achieve this early retirement or freedom. Most of them will live quite frugally and funnel any extra savings into their investments, until they have enough passive income to cover their expenses. While the movement name includes the words “retire early”, many do continue to work but focus on passion projects or things they would do for free anyway, as the money is no longer important. Some people in the FIRE movement retire as early as their early 30s, however their 20s is spent living very frugally and investing as much as possible.
While I think there are some great concepts to take away from this movement, I believe life is there to be enjoyed and you are never promised tomorrow. Therefore, spending my 20s working non stop and living off rice and beans just isn’t my thing. However, being mindful with your money and investing early for the long term is a great attitude to have and one I encourage.
Summary- Why do I Invest?
I invest for probably all of the reasons above. I want to have choice later in life so I am trying to work hard now so I can enjoy life in the future. I am not as hardcore as some of the FIRE movement, I live far from frugally. However, I am mindful of what I spend and do try to put a regular amount away per week for future me. I am trying to do this early as the more time my money is compounding the more it is going to grow. I am a travelling fanatic and I would one day love to buy myself business class plane tickets to a destination. That’s just one of my bucket list items and investing will help me get there. Having a passive income will also provide the flexibility for me to continue to travel later in life and keep doing what I love doing.
Money Smart Compound Interest Calculator