#63 - Personal Finance 101 - Why to invest?
Say, you are buying a thing for $10 this year. In the next year, you would be paying x% more to buy the same thing. This is because of inflation.
In economics, inflation is a sustained increase in the general price level of goods and services in an economy over a period of time. When the price level rises, each unit of currency buys fewer goods and services. Consequently, inflation reflects a reduction in the purchasing power per unit of money — a loss of real value in the medium of exchange and unit of account within the economy — Wikipedia
The money that is lying in a savings bank account this year might have less purchasing power in the next year. So to beat inflation, you need to invest in instruments that provide higher returns than the rate of inflation.
One should start investing early to take advantage of compounding. A person who starts investing at 25 will make more money while retiring compared to a person who starts investing at 35.
Also, your investments should generate money to buy things. Otherwise, you will get into the vicious cycle of loans.
P.S. I have been writing on Personal Finance 101. Do I have skin in the game? I am 27 years old now. When I first started my career, I didn’t save much but I saved. I didn’t follow any disciplined approach in saving and investment. Then I founded a startup and bootstrapped with my money. After a year and a half, we had to shut down the startup. I was totally broke staring at a very serious debt. I decided to crawl back from this rabbit hole with all energy that I could muster. After 2 years, I am financially independent. I am trying to compile my financial learning in the recent years.