It doesn’t have to be either/or - saving and investing are two sides of the same financial freedom coin
You have savings. Your diligence and hard work made that happen. You are proud, look how far you have come from the spendthrift nature of your younger days.
As you stare at the digits on your screen, you realise that you are looking at the seeds of your future security. Those savings represent hours, days, and months of your life, and you've cleverly stored them away, protecting you and ready for whatever life throws your way. Now the question is, do you choose to plant those seeds or leave them in the shed?
A reality check for your personal finance
The cost of living is rising, and no amount of interest will ever keep up with the cost of living as inflation rises. This sends a bittersweet ripple through your thoughts. All those savings are slowly being eroded by time. It doesn't feel right.
What if there was something else you could do to lessen the blow of time to get that money working for you, growing stronger and protecting you?
Think of how much a carton of milk is now compared to when you were younger. That is inflation working its dark magic on your money.
The saving money dilemma
While having money in savings is a must, we all need a rainy day find, emergency fund and savings set aside for the next big purchase. What if the extra didn't have to sit idle and lose its power, shrivelling over time?
While it's tempting to stick with what feels safe - like keeping your cash hidden away - this comfort zone could be holding you back from building real financial security. Cash offers great short-term and medium-term stability; however, it rarely offers growth.
What about that additional money; the money that doesn't have a specific job and isn't needed for seven or more years? That money doesn't have to just sit wasting away in a savings account. You can send it out working for you, growing and multiplying over time.
In life, nothing is perfect; there is no true win or lose, only trade-offs. So, while cash offers stability, it falls short when it comes to growing your money over the long term. The simple reason is that inflation erodes the purchasing power of cash, meaning your money loses value over time, even if it seems safe in a savings account. Think of how much a carton of milk is now compared to when you were younger. That inflation is working its dark magic.
But what if the real risk lies in not taking any risks at all?
Our money story can hold us back
Many of us, especially those with roots in countries where financial security was anything but certain, may find it hard to shake off the fear of losing money. Ireland's history and our general angst around taking financial risks can attest to this. Cash might feel safer, especially when we hear about crashes and downturns, these constant reports in the media make the stock market seem unpredictable, even scary.
But what if the real risk lies in not taking any risks at all? What if the key to financial freedom is seeing the stock market as an opportunity not as a threat?
Investing is the other side of the financial security coin
This is where the stock market can step in and play its part. Despite its ups and downs, investing has time and again proven its potential to create wealth for those willing to embrace it.
In spite of its volatility, the stock market has historically provided higher returns over time. Understanding the market's ups and downs is important - it's a natural part of investing, not necessarily a sign of risk. It's simply how investing works. As unsettling as this might seem, recognising that the stock market offers a powerful tool for building wealth can change the trajectory of your future security.
"How many millionaires do you know who have become wealthy by investing in savings accounts? I rest my case." Robert G. Allen
Why invest?
Investing in stocks allows your money to work for you, growing through compound returns and the historical overall upward trajectory of the market. Compound returns are the returns you earn on your initial investment, as well as the returns on those returns. By viewing the stock market as a long-term investment, you can look past short-term ups and downs and focus on the long game. The key is to make informed, strategic decisions that line up with your life goals. Over time, this approach can transform your financial journey, helping you build the security you've always wanted.
Need to know investing facts
To show that leaving extra cash in savings, (the savings you won’t need for at least 10 + years) may be riskier than investing in the stock market over the long term, here are some of the facts:
1. Long-term stock market returns:
- The S&P 500 has averaged annual returns of about 10% over the past century (before inflation).
- The average annual return is around 7% when adjusted for inflation.
2. Cash loses value due to inflation:
- The average annual inflation rate has been around 3% over the past century.
- This means cash essentially loses about 3% of its purchasing power each year.ie €100 one year spends like €97 euro the following year.
3. Historical comparison:
- €10,000 invested in the S&P 500 in 1970 would have grown to over €1.5 million by 2020.
- The same €10,000 left in cash would be worth only about €1,627 in 2020 due to inflation eroding it.
4. Frequency of positive returns:
- The S&P 500 has provided positive returns in about 70% of calendar years since 1926.
- Over any 20-year period, the S&P 500 has never had a negative return when adjusted for inflation.
5. Recovery from market downturns:
- Despite many market crashes, the stock market has always recovered and gone on to go higher again and again.
- The average bear market lasts about 14 months, while the average bull market lasts about five years.
6. Cash vs. Stocks during high inflation:
- During the high inflation period of the 1970s, stocks still outperformed cash.
- From 1970-1980, the S&P 500 returned an average of 5.8% annually after inflation, while cash lost buying power.
Disclaimer:
Remember, while these points demonstrate the potential risks of holding cash long-term, it's important to note that stocks can be volatile in the short term. A balanced approach considering an individual's risk tolerance and time horizon is key.
The big money is not in the buying and selling, but in the waiting. Charlie Munger
Final thoughts
In the journey towards financial security, it's important to recognise that what feels safe doesn't always end up being safe. While keeping a portion of your money in cash may shield you from short-term ups and downs, keeping all of it in cash over the long term limits your chances for long-term financial freedom. The data shows that the stock market has consistently outperformed cash over time, even when accounting for inflation. Realising that market ups and downs are part of the investment journey can open the door to growing your money and a more secure future.
By shifting your mindset and taking calculated risks, you're not just preserving your wealth - you're actively building it. The real danger lies in staying stagnant while inflation erodes the value of your hard-earned money. So, make informed, educated decisions, and let your money work for you. Investing isn't just about growing wealth; it's about securing financial freedom.
Now, go out there and make your money work for you by signing up to the Rise Money Newsletter, where I share money insights, mindset and investing tips every week.
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