Understanding the WHY Behind Saving & Investing
Understanding the WHY Behind Saving & Investing
Getting it right the first time
Over the past 15 years, it feels like I’ve heard it all. The stories from investors saving for retirement are all over the board. From “Man, if only I would’ve started saving when I got my first job”, to “I’ve never really understood investing, so it’s probably best I just wait until I have time to figure it out.” Then, of course, my favorite, “My retirement plan is to win the lottery!”
One of the obstacles is that many of us have very little knowledge of investing. It’s not exactly standard curriculum in school, and most of us have little desire, let alone the time, to actually dig in and learn it ourselves. My goal in the next few paragraphs is to give you a basic understanding of saving, investing, and most importantly, WHY we do it.
I heard a saying about 10 years ago that I’ve latched onto ever since. There are three things that we can do with our money. We can SPEND it (nobody needs help with this on, we are experts already). We can SAVE it. We can INVEST it. It’s critical to establish the foundation that saving and investing are two very different things. In short, savings is designed for short-term needs like your emergency fund, a new dishwasher when the old one finally dies, or maybe braces for a child. We SAVE money that we will need to have access to over the short-term, say up to two years. The major concern here is not how much money we can earn, it’s accessibility. We need the money when we need it, and we don’t know when we’ll need it!
Investing, when done right, is done with a focus on the future. We INVEST for the long-term. We invest for things like retirement, kiddos college, etc. It’s noticeable right off the bat that these things are not near-term expenses. They are more than two years away for most of us and that should get us out of a saving mindset and into an investing mindset. What’s the major difference, you ask? We need our long-term money to GROW. And this brings us to a crucial point, and one that you should understand. WHY?
Why should you invest? Think about it. We know that investing involves some degree of risk, so why risk our money? Why do millions of seemingly same people in this world take risks with their hard-earned money? What’s your gut reaction? They could lose money, right? so why do they invest?
I’ve been asking this question for years to literally thousands of people, and I usually get an answer like: “So my money will grow.” Why do you need your money to grow? “So I’ll have more of it.” But WHY do you need more money? “So I’ll have more of it.” But WHY do you need more money? “So I will have more money to spend.” Why do you need more money to spend? “So I can quit working and live the same lifestyle or maybe even improve my lifestyle.” This is about the extent of our understanding as to WHY we invest our money. A critical reason we invest is a dirty little word called INFLATION. We have to invest in order to keep up. Inflation is the cost of goods (cost of living) getting more expensive. If our money doesn’t grow because we don’t want to take risks, we are effectively ensuring the very thing we are afraid of. We’ll go broke slowly. Think about it, according to cars.com, the number one selling car in 1985 was a Chevrolet Cavalier (it was ugly!). Brand new, it cost $9,005. The number one selling car in 2016 was the Toyota Camry. Brand new, it cost $24,840.
So, if you had $9,000 in 1985 and “saved” it, did you lose money? Technically, no. But, you did lose purchasing power. That’s WHY we invest. In my opinion, you can’t afford NOT to.
