Top 8 Benefits of Investing: Why You Should Start Investing

You’ll hear about investing everywhere, from financial websites to news articles. It’s often touted as the best way to grow your money. But what exactly are the benefits of investing, or investing itself? Is it just about stocks, cryptocurrency, or futures contracts?

While those are all investment options, investing goes beyond that. In essence, investing is a key financial concept that involves using your current assets to target future returns. You can invest in stocks, businesses, or even yourself through education and skill development.

Now that you understand the core concept, the key question becomes: is investing your current resources worth the potential for better returns down the road? The answer lies in the numerous benefits of investing, which we’ll explore next.

The Benefits of Investing: Should You Invest Now?

Understanding the potential benefits of investing is essential to understanding how you can improve your financial circumstances. Moreover, once you can envision your finances’ growth potential, choosing investments will be easier.

1. Provide Long-Term Growth

Be it money or skills, investing leads to long-term returns and often greater growth. However, this benefit comes at the cost of adequately mitigating the risks that come with investments. After all, there’s no complete guarantee that there will be higher returns for all the investments you make.

For example, let’s look into two forms of investments: savings account and stock.

Yes, placing your money in a savings account is a form of investment in the bank of your choice—though most don’t refer to it that way, and they see it as parking your money instead. As the bank has more reserve money, it can earn from loans, which in turn allows it to give interest on the money you saved.

Anyway, between the two investments, saving money in your bank account has less risk and almost guaranteed small returns, while investing in stocks has higher risk but potentially high returns.

Choosing your investment is key to experiencing the benefits of long-term growth.

Also, be sure to look into risk mitigation.

2. Reach Financial Goals

One of the many benefits of investing is to achieve your long-term financial goals, like buying a house or funding your child’s education. By making smart investment choices, you can safeguard your financial future and acquire the things that matter most to you down the road.

As the saying goes, you work for today, you invest for tomorrow to start building a brighter, financially stable future.

3. Escape Inflation

To be honest, putting your money in the bank is a very safe way to invest. However, the biggest problem with it is that the return is too low to counter inflation, which effectively decreases purchasing power.

And if you’ve watched or read the news lately, inflation is very rampant and aggressive.

Just imagine, you can grow your money by 5% annually if you have a high-yield savings account. But if inflation makes the cost of living go up by 5% or 6%—by the way, in 2022, it was 6.5%—the interest you gain will be useless. And it doesn’t help that the average interest rate is only a measly 0.45%–0.59%.

To escape inflation through investing, you need to think and find the best investments. You can consider investing long-term in S&P 500 companies, as it has been historically reliable in exceeding the rate of inflation.

4. Gain Additional Income

In the previous sections, I have often mentioned and emphasized investing’s benefit of future returns. This time, let me tell you about how you can also earn in the short term with it and aid you with additional income!

Again, this benefit will be based entirely on your investment decisions.

Some good examples of investments that can supplement income are real estate rentals and small businesses.

Aside from the two I mentioned before, you can also utilize the stock market to get some short-term gains. But, as always, understand that going for higher potential returns—especially if it’s for short-term profit—often comes with greater risk. If this isn’t true, then everyone would be rich by now!

Anyway, there are also investment options, like dividend-paying stocks and certain bonds, that can provide regular income streams.

5. Become Financially Literate

Getting yourself into investing right away can make you feel like a fish out of water and push you to your limits when it comes to your financial knowledge.

Why? Well, as a forewarning, let me tell you that you may make costly mistakes along the way. And these mistakes will give you lessons that hit hard on the pocket, which will definitely, definitely unravel how money works in mysterious ways for you—was this overly dramatic? I don’t think so!

Of course, there are ways to avoid these mistakes as early as now, and that is through intensive learning of what you need to do—financial literacy, in short.

For one, start by understanding the value of a diverse investment portfolio. By doing so, you can avoid the biggest regret you may incur in investing, and that is losing everything.

Diversifying your portfolio basically means you need to spread your investments everywhere.

It can be across different asset classes, industries, and geographical regions. This approach helps protect your investments from major losses if a particular sector or region experiences a downturn.

6. Cushion Retirement

Buying a house and getting your kids’ education covered aren’t the only financial goals you need to worry about—there’s a lot, truth tell! You also have your (and your spouse if you have one) retirement to think of.

With investing, you can secure yourself during this phase of your life.

Thankfully, our government system and employers have given people an easy-to-understand path to invest for retirement—namely 401(k)s and IRAs (Individual Retirement Accounts). With these accounts, you can have the assurance of having money once your career is over.

That’s not all!

Contributions to these accounts are often tax-advantaged. This means that you can save on taxes while your investments grow. After all, the less take-home money, the less money the government can tax you.

Additionally, employer matching contributions in 401(k)s are essentially free money to boost your retirement savings.

Of course, you’re not limited to your 401(k) or IRAs alone.

As mentioned, you can always diversify your portfolio to help secure your retirement. This is especially important as 401(k) plans and some IRAs are currently facing potential challenges—they’re kind of grim as of the moment, to be honest.

7. Grow Your Wealth

Investing ultimately boils down to growing your wealth. Even if you’re wealthy now, you can’t be certain it will stay that way tomorrow. It’s a pessimistic view; I know.

But it’s better to be safe than sorry—trite but always true.

Remember, growing your wealth through investments is like growing a tree—just like a real-life money tree!

You plant a seed, which can be a decent sum of money that you can live without in the meantime. After a while, it will grow into a fine tree that you can harvest or keep growing. Of course, it won’t grow by itself. You need to take care of it!

And you also need to diversify—I mean plant more—to ensure a few will survive, allowing you to reap the benefits.

There are many success stories that revolve around investing. And don’t cave in and think it’s a “game” for the rich. It isn’t.

It’s a game for people who can be smart and patient, have the clarity of mind to choose the right investments, and make the right move when pulling out and getting their returns and investments back.

8. Enjoy Tax Advantages Of Investing

Although this warrants a different section since it goes beyond surface exploration, it’s still one of the best benefits of investing.

And that’s because investing provides various tax advantages. These advantages can give you not only future benefits but also benefits today. Some of these advantages are the following:

Retirement Accounts

I did partially mention the tax advantage of retirement accounts, so here’s some additional info.

Having and contributing to a traditional IRA, Roth IRA, 401(k), or 403(b) can provide certain tax benefits. Traditional IRAs and 401(k)s allow you to deduct contributions from your taxable income, which can reduce your tax bill by a certain amount.

Meanwhile, Roth IRAs don’t offer immediate tax benefits on contributions, but they allow for tax-free growth and withdrawals in retirement.

Capital Gains Tax

Investing benefits from capital gains tax, especially in real estate and stocks. When you sell an investment for a profit (a capital gain), the tax rate depends on how long you keep the asset.

Long-term capital gains (on assets held for more than one year) typically have lower tax rates than ordinary income. This encourages long-term investing and can reduce your tax burden on investment gains.

Do note that tax rates may differ by state, so research first before taking advantage of capital gains tax benefits in your investments.

Dividends And Qualified Distributions

Under the capital gains advantage, you can also have lower rates when dealing with qualified dividends from stocks and certain mutual funds. Similarly, distributions from investments like REITs (Real Estate Investment Trusts) and some mutual funds may qualify for reduced tax rates under specific conditions.

However, not all REITs qualify for lower capital gains tax rates because their distributions are often treated as ordinary income, not qualified dividends. This means they are taxed at your regular income tax rate. So, understand how your specific REIT treats distributions for tax purposes.

Tax-Loss Harvesting

Tax advantages on investing don’t happen automatically. Sometimes, you need to be smart about it and know how you can qualify.

Tax-loss harvesting is a beneficial strategy that can help you reduce your tax bill. To utilize it, sell investments that have decreased in value (showing a capital loss) to offset capital gains realized from other investments.

Depreciation And Deductions

If you’re involved in real estate, you’ll find depreciation and deductions very beneficial. Depreciation allows you to deduct a portion of the building’s cost from your taxable income each year. This spreads out the cost of the property over its useful life, effectively reducing your tax burden.

Depreciation benefits you by improving your cash flow, especially if you own rental properties. Even after factoring in potential maintenance and vacancy costs, depreciation can significantly increase your after-tax returns in the long term.

Exploring Different Investment Options

Let’s now go into the technical details of investing.

While I did say opening a savings account or improving yourself is a form of investment, they aren’t in a serious financial sense. And if you’re attracted by the benefits of financial investments, then you should know what your investment options are.

After reading all the things I wrote, you may think that you might want to try all your options since diversifying your investment portfolio raises your chances of success and achieving all the benefits.

So, now, view this table to get a good idea of what your options are.

Traditional Investments Vs. Alternative Investments

As you saw, risks are associated with each of your options. Whatever serious financial investments you make, there’s always a chance, whether small or large, that you can incur loss. To mitigate this risk, you need to learn how to navigate it and come up with sound investment decisions.

To navigate risks appropriately, know yourself and your finances. How high is your tolerance to risk? Can you sleep well every night after investing your hard-earned cash instead of spending it for your needs and wants? Can your financial capacity shoulder the losses you may experience?

Depending on how you navigate the risks, how much you can invest, and the success or possibility of returns in your first initial investment, you can proceed looking into diversification.

Lastly, remember that no guide can be a one-size-fits-all investment bible. You always have the option to consult a financial advisor who can help you decide on your investments based on your unique situation.

FAQs

What is the main benefit of investing?

Primarily, investing can potentially help your money grow faster than a traditional savings account or keeping your money stashed away. Of course, with the right investments, you can get great returns. And with more money, many other benefits follow.

What are the positive effects of investing?

First of all, you become more financially literate. You’ll learn how to make educated guesses on where the money goes and grab profitable opportunities. And obviously, you get to grow your wealth in a way that may be potentially more rewarding than your current career or supplement what you currently have.

What are the three main reasons for investing?

Considering the current economic situation, the three primary reasons to invest are to beat inflation, secure retirement, and reach financial goals.

What are the pros and cons of investing?

In simple words, the main pro of investing is wealth, and the main con is risks or losses. Remember that the benefits of investing include the potential to generate significant returns, outpace inflation, and help you reach financial freedom.

Of course, all investments carry inherent risk, so you could lose your initial investment. Before making investment decisions, you should always consider your risk tolerance, financial situation, and investment goals.

Conclusion

Once you reach the point in your life that you have enough money to keep and you won’t need to spend or set aside for emergencies, the next step is to invest. And with all the benefits of investing listed here, it’s truly a very attractive thing to do.

However, don’t do it willy-nilly. Always do your best to research and learn more about finances and investments. These benefits of investing will be nothing if you make bad investment decisions.