Lesson #6.2 Why Saving Alone is Not Enough, And Why You NEED To Invest
If you’re liking what you heard in the last lesson and you’re ready to start throwing your dollars into your piggy bank then I love your enthusiasm … but hold up for one quick second.
Saving is a great way to start reaching your goals in the future, but investing is really what will take your efforts to the next level
Huh? Isn’t Saving The Same As Investing?
People like to use them interchangeably, but they aren’t.
Saving is more for short term goals, think – emergency funds, saving a down payment for car, or any goal where you’ll need the funds in 2 – 3 years.
Investing is more for long-term goals, think – retirement or building wealth.
Savings is a good habit that can lead to investing, but investing is where the real magic happens.
Here’s why:
Investing Makes Your Money Do Most of the Work
Investing can earn you 5 times what just savings would earn you, thanks to the power of compound interest.
It’s rumored that Albert Einstein once said it’s the 8th wonder of the world.
Whether it’s true or not, one thing for sure is that Compound Interest is the financial math you love to know.
It’s basically getting paid interest on top of interest.
So let’s say I give you $100, and tell you that I’ll pay you 20% interest per month (compounding)
After the first month, you’ll have $120 ( that’s $100 (the principal) + $20 (that’s 20% of the $100 also known as the interest)
Because it’s compounding, at the start of month 2 your new principal is $120, and I’ll pay you 20% interest on that $120.
So now, at the end of month 2, you’ll have $144.
That’s $120 (the new prinicpal for month 2 or $100 + 20) + $24 (that’s 20% of the $120, also known as the interest)
Because it’s compounding, at the start of month 3 your new principal is $144, and I’ll pay you 20% interest on that $144.
So now, at the end of month 3, you’ll have $172.8
That’s $144 (the new prinicpal for month 3 or $120 + 24) + $28.8 (that’s 20% of the $144, also known as the interest)
And so on, and so forth.
And you thought math in high school was only about how long trains took to pass each other!
Compound interest is the most powerful force in the universe.
– Albert einstein
The Difference Between Investing and Savings Can Be Millions
Investing can be the difference between living a rich life, and barely living paycheck to paycheck for the rest of your life so don’t sleep on this lesson.