Why Is It Important To Invest Your Money Than Saving it?

Why Is It Important To Invest Your Money Than Saving it?

For simple reason, it is important because you need to learn how to grow your money by beating inflation!

What Is inflation?

Simply put, inflation refers to the increase of prices of everything that you buy over a period of time. For example, 40 years ago your grandparents pay $2 dollar for a pair of movie tickets. Guess how much it costs you now? $8 dollars? That’s 400% increase!

What Causes Inflation?

There are many mays to explain what causes inflation. In economist view, it is caused by increasing of money supply due to changes of monetary policy in that particular country.

However, it can also be illustrated with the theory of supply and demand effect. Think about it, populations are increasing while natural resources are decreasing constantly. There are more people than ever before are buying food to eat and clothes to wear; and food and natural resources are getting lesser and lesser. With more demand to consume and less supply to produce, prices go up, and lead us to inflation.

What Will Inflation Do To You If You Don’t Invest Your Money?

Let’s assume the below scenario:

Annual Inflation rate = 3.5%

Saving Interest Rate = 0.5 %

Prices of a Television: $1000

Amount of Money to Save: $1000

By using compounding formula, and after rounding off the figures, in three years’ time:

Cost Of Television After Three Years:

Year 1=> $1000 + ($1000*3.5/100) = $1035

Year 2=> $1035 + ($1035*3.5/100) = $1071

Year 3=> $1071 + ($1071*3.5/100) = $1108

Amount Of Saving After Three Years:

Year 1=> $1000 + ($1000*0.5/100) = $ 1005

Year 2=> $1005 + ($1005*0.5/100) = $1010

Year 3=> $1010 + ($1010*0.5/100) = $1015

The loss in dollar value => $1108 – $1015 = $93.

The loss in percentage => $93/$1000 * 100 = 9.3%

So here’s the reality, the money you are saving which is good enough to buy you a television now, in 3 years’ time, you will need to find extra money just to top up the difference!

Now I am not saying you should just go ahead and buy a television now and hope to sell it in future so you don’t lose the $93 dollar. Because if you buy a television now and in three years’ time it will probably worth $500 dollar. The idea here is to describe how money itself will lose its value overtime if you just put it into saving with ultra-low interest.

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