Investing to meet goals

The best reason to invest is that owning capital assets can help you meet your mid-term and long-term financial goals. Even if you plan on earning more income in the future than you do now, most people can't pay for big expenses — like college tuition or starting a business — out of their everyday earnings. And when you retire, you're likely to be earning less.

Beating inflation

Unlike money in savings accounts, which over time is vulnerable to the effects of inflation, or gradual loss of buying power, money that's invested has the potential to be worth more as time goes by. This is true usually because investing involves taking on more risk than saving does — with higher rewards paid in the form of better rates of return. One reason this is true is the result of compounding, which occurs when your investment earnings are reinvested, or added to your principal to form a new, larger base on which future earnings may accumulate. Reinvesting your earnings by putting them directly back into your account is often easier than finding new money to invest.

Comparing results

The way that a compounding investment differs from a compounding savings account is the average rate at which earnings are added. For example, if you deposit $10,000 in a certificate of deposit (CD) that provides an annual percentage yield (APY) of 3%, your account will be worth $11,593 after five years if it compounds annually. But if you invested $10,000 in a diversified portfolio with an average annual return of 8%, your investment will be worth closer to $14,693 after five years. In both cases, the assumption is that you're not taking any money out to pay taxes that may be due.

And the longer your investment account continues to compound, the more potential it has to grow. The same $10,000 investment with the same average annual return of 8%, compounded annually, will be worth $100,627 after 30 years.