We are fans of investing. Not the sandwich, but our money. Investing to make our earned money become more money. To grow our assets without having to do very much to do so. Not to let your money languish in the savings account (because we know that inflation is currently higher than savings rates). But is investing smart? For everyone? And why exactly? And how does this theory work? In this article, we explain why investing is smart.
Is investing a good idea?
Investing can be smart, but only with money you can spare. Whether investing is wise depends entirely on your personal financial situation. Make sure you have a well-stocked piggy bank that will last you for a while, and don’t invest with money you need short term. Investing has risk, this you can minimize but never eliminate.
What is investing again?
An investment is a form of investment in which money is committed for a longer or shorter period of time for the purpose of future financial gain.
Investing can be done in several ways. You can invest in the stock market, in stocks, bonds or ETFs. You can also invest in real estate. Or in cryptos. Or in gold. It’s about diverting your money to something on the assumption that your money is going to be worth more.
You also have different ways óm investing. You have people who daytrade and try to predict every day what will happen and hope to make large amounts of money by doing so. You have people who buy shares of 1 company very specifically because they believe in it. You have people who actually want to have a very diversified portfolio and I every market, in every country, in every industry. You have people who don’t want to spend more than 2 minutes a month on it (yes, this really is possible!).
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Need a quick refresher on your knowledge of investing? You can do that here!
Why is investing smart?
Risks
“Okay,” we hear you thinking, “nice all that theory but briefly explain to me why investing is so smart? There are risks involved, aren’t there?”
Yes, let’s put that first: there are risks in investing. After all, you can lose money. Indeed, history has shown that the economy is fickle, creating “yankee laughs yankee cries” situations. You probably remember the crisis of 2008. And for slightly older readers: the crisis of 2000. Or how about March 2020? And 2022 was not a very good year either. And yet, even though investors have had sleepless nights, the economy has recovered and indeed, historically, prices have always been on an upward trajectory.
Weetje! Despite all the crises in the stock market, the average return per year from investing in stocks over 100 years is about 8%.
Compound
Apart from the risks, which you minimize by spreading out well and taking your time, investing is smart because of the following: compound interest. In peasant language, this means: a fact that causes your money to actively work for you. How? Well, like this:
You invest 1,000 euros in year one. You will receive 8% interest.
In year 2, you then have 1000 + 80 = 1080 euros.
Then the interest of year 2 is calculated on that 1080 euros.
So in year 3 you have – again at 8% interest – 1080 + 86.40 = 1166.40 euros.
Give this 10 years, and your deposited 1000 euros will be worth 2159 euros! Didn’t have to do anything for it.
But suppose you have 20 years, then suddenly your invested 1,000 euros is worth 4,661 euros.
And suppose you decide to put in a one-time 1,000 euros. And you also understand the spread game well, so you put in an extra amount every month, say: 200 euros. And you do that for 20 years. Then your final capital after 20 years will be 119,193 euros! Man, how delicious!
And are you young, and can you sustain this for 30 years? Then with a one-time deposit of 1,000 euros, a monthly deposit of 300 euros, at an average return of 8%, you will have accumulated 435,347 euros after 30 years!
Conclusion
This principle, compound interest, makes investing smart. The example we use assumes index investing, in so-called ETFs. Read everything you want to know about ETF investing here.
