Here are the basic reasons for investing.
- It gives us a sense of financial security, earned by continued discipline and adherence to the principle of saving, which adds to our sense of personal dignity.
- We are eventually rewarded by seeing money make more money as it works for us, gaining and compounding.
- Saving paves the way for the actualization of our goals and objectives in life, such as acquiring a home, making major purchases, travelling, putting children through college or university, or going back to school.
- Accumulated assets can increase our net worth, and bring us to financial independence. Such control and flexibility are within our reach if we start now.
- Inflation generally increases your cost of living. Think of this another way. Inflation decreases the future value of your money’s purchasing power.
Stumbling blocks that underestimate inflation. Don’t defer to only saving what’s left at the end of the month, or waiting until “things get better”. Most people if not disciplined to maintain a budget, will spend up to their income. Usually, there is nothing left at the end of the month and things rarely improve because the philosophy hasn’t changed – spending up to your income level leads to spending above income. If above-income spending continues, debts increase. Except for a home mortgage or loans for motor vehicle transportation, and in some cases for investing; debt is a big deterrent to financial independence that can keep ahead of inflation. Commit to a strategy to pay down all household debt and start saving at least 10% of your income every month. And this is also very important: be very aware of the devaluation of your future money due to inflation,
Inflation is an increasing threat to financial sustainability. In February, the Canadian consumer price index (CPI) increased 5.7% year over year, up from a 5.1% gain in January. This was the largest gain since August 1991 (+6.0%). February marked the second consecutive month where headline inflation exceeded 5%.1 Over the years, inflation reduces our buying power. Interest rates when increasing to reduce inflation also increase our debt repayment load as a percentage of income. The following table shows just what inflation can do to your investment income when needed during retirement. When looking at this projection of how inflation can shrink the value of your money, we suggest that you plan conservatively using investment rates that project a 4-6% increase per annum.
1 StatCan