The word ‘investing’ sparks a range of emotions, from excitement and curiosity to worry and concern. And all of those feelings are valid, based on our personal experiences and goals. While we all have our reasons for feeling a certain way about investing, it is important to understand that investing has a clear role in our financial lives.
Having peace of mind about your financial strategies, including investing, starts with recognising the purpose of investing. If you’re wondering how investments play a role in your bigger financial picture, you’re in the right place.
Why Do We Invest?
Investing money is fairly simple when we take out all the noise too often attached to it. When we lend money to an individual or, more commonly, an institution in the hope of being paid back that money plus a return, we’re participating in an investment. There are several methods to invest, but they all work along the same lines.
Why would anyone take that risk, though? The objective is clear: we want to make our hard-earned money grow over time. Without some level of earnings on our savings or nest egg, it is difficult to maintain the purchasing power of our money – also known as keeping up with inflation.
The concept of inflation can be hard to grasp, so let’s look at an example. 40 some years ago, the cost of a pint of beer costs a measly 10pc. Today, that same pint costs a little more than £3. While that may not seem like a giant leap, the effects of inflation are far greater when we look at larger purchases, like property or a new car.
Currently, the inflation rate is at 3%, but regular savings accounts are close to 1%. This means that by keeping money in a “safe” savings account or as cash, we are doing a disservice to our financial goals. Investing provides an opportunity to outpace rising inflation, making our money go further.
Having a Specific Purpose
Although beating inflation through investing is important, it is also necessary to understand the why. We recently had a client approach us asking for an investment that could generate 3.2% return. After asking him why that number, he shared that his current return was only 2.5%, and he thought he could do better.
However, he had no reason for wanting to earn more on his money.
There is a quote from Alice in Wonderland that reads, “One day Alice came to a fork in the road and saw a Cheshire cat in a tree. ‘Which road do I take,’ she asked. ‘Where do you want to go?’ was his response. ‘I don’t know,’ Alice answered. ‘Then,’ said the cat, ‘it doesn’t matter.’”
Without a purpose behind investing, there’s no way to know if we’ve reached our destination or if we’re on track for doing so.
Preparing for Retirement
A common reason for investing is gearing up for a comfortable retirement. Today’s retirement landscape looks very different from a generation ago, as annuities and final salary pensions have become less prevalent. Without these pillars of financial stability, many fear their savings won’t last.
Adding to the need to invest for retirement is the fact that we are all living longer. Life expectancy continues to increase year over year, and while that means we can enjoy an active, meaningful life throughout retirement, it also requires making our money stretch. Investing offers a way to generate a return that serves this purpose specifically.
Leaving a Meaningful Legacy
Just like the financial environment has changed for those of us near retirement, so has the landscape shifted for our children. Many young adults are burdened with student debt, find it difficult to join the property ladder, and have no guarantee of a pension to fuel a secure retirement. Because of these growing concerns, leaving money to pass on to the next generation is a crucial part of the bigger financial picture.
Leaving a meaningful legacy while also enjoying a long-lived retirement makes investing necessary for most. The ability to earn more on the money we worked hard for and saved over a lifetime lays the groundwork for setting adult children up for their financial future.
Investing serves as an important facet of comprehensive financial planning, and it often takes away the need to work harder or longer to achieve specific goals we set for the future. If you want expert, friendly guidance on how to invest based on your needs and wants, get in touch with our team today.
As an exclusive offer for friends, family, and colleagues of our valued clients, we provide a Second Opinion Service to help the ones you care about understand their financial situations better. If you know someone who would benefit from this service, feel free to pass this information onto them directly.