One of the many phrases repeated to me growing up was “money doesn’t grow on trees”. In order to expect to earn a certain amount of money, you have to put ready to put in your fair share of sweat, blood, and tears, so to speak. Whilst this is true, it is only a part of the whole picture, because what if you could plant your own money tree? What if you could plant a seed and over the years watch it grow into a larger and larger money-making tree? This is very possible through the world of investing.
No matter how I wished financial literacy was a compulsory subject at school, I cannot change the past. What I can impact, however, is my future, and so in recent years, I’ve started to educate myself about all things personal finance and investing. From building multiple sources of income to the hope of enjoying early retirement, below I share some of my reasons why I started to invest in my 20s.
A Source of Passive Income
Put simply, active income is the hard-earned money we earn in exchange for our labour or services. It is the average 9 – 5 job that you clock-in, do your work, and clock-out and that’s what you get paid for. On the other hand, passive income is the money earned on an investment, or work completed in the past, which requires (at present) little to no active involvement on your part to generate ongoing revenue. Essentially, you make money in your sleep. I don’t know about you, but #goals!
It really depends on your investment strategy (short-term vs. long-term) whether or not investing can be considered entirely passive income. I am in it for the long haul, so my eyes are set far into the next 30 – 35 years. I’ve set up an investment plan where monthly a certain amount of money goes into a few pre-selected mutual and/or index funds in my portfolio, and then it is left there to do its job aka. grow. However, if you are more involved in buying and selling stocks for short-term profits, it naturally requires you to be more active.
Low Barrier to Entry
Another reason why I like to invest in funds is due to its low barriers to entry. You can start investing with as low of a budget as your current situation allows. If you are able to squeeze 15€ per month out of your budget to invest in the Future You, that can set you already well on your way.
In comparison, before you are able to purchase an investment property, you need to have saved up a certain amount of money upfront before being able to apply for a loan. Saving for such an amount of money can take years, whereas with investing you can start pretty much whenever. The sooner the better.
The Power of Compound Interest
Time is the decisive component especially when investing in some sort of fund – the longer your money has time to grow, the more you will earn. That is why the earlier you can plant that initial ‘seed’ or the principal sum of money, the quicker it will start to compound interest, and thus, grow in amount.
Albert Einstein allegedly said that compound interest is the eighth wonder of the world and that the person who understands it earns it, and the one who doesn’t, pays it.
Over time compound interest creates a snowball effect in which your investments begin to grow exponentially. Compound interest is the result of reinvesting interest, rather than paying it out, so that interest in the next period is then earned on the principal sum plus previously accumulated interest. So really, you are making your money work for you.
Beat Inflation
Inflation is the rise of prices of common goods such as food, clothing, housing, transport, etc. With every year as prices rise due to inflation, the less you can buy with your money. That is why if you leave your money to lie in a savings account – where nowadays interest rates are close to non-existent by the way – that money is worth less and less. When you invest your money in the stock market it will keep growing and despite economic crises, history shows, that the economy will recover with time and continue its trend upwards. Don’t be fooled, investing does carry its own risks, but when approached in a disciplined manner, it is one of the most efficient ways to build up your net worth.
The ultimate goal: Financial Freedom
In the best-case scenario, by building multiple sources of (passive) income in addition to investing in funds, it is possible to attain financial freedom. Financial freedom is when you control your own finances instead of being controlled by them, and being able to make life decisions without being too stressed about the financial impacts. Also, I would like to eventually retire when I am in somewhat good health and still have some of that excitement left for life. Here’s to hoping I will age like a fine bottle of wine haha!
A marketing professional in tech by day, Lilli finds a creative release in exploring and writing about her perfectly imperfect human experience on muija. With heart and soul, she is learning how to navigate this life, and in sharing her stories Lilli hopes to inspire others to follow their curiosity, too.