Without a means for multiplying your current assets for future use, an investor is impotent to make any solid plans, because putting aside money now, to be used even in one year promises to be a lesson in defeat. This is because the cost of living over time always rises.
Investing is therefore a way to win the race against inflation. It is this simple fact that forms the essence of why investing is a crucial part of financial planning. A simple example may illustrate the point. A loaf of bread in 1980 may have cost half as much as the same loaf of bread costs now. A person in their mid-forties during the eighties may have put aside some money in a savings account for retirement, but they would be in a sad state today, because the cost of that loaf of bread is probably now triple or quadruple the cost of what it once was.
The same goes for everything that makes up an average basket of consumer goods. If you were to estimate the cost of housing, electricity, clothing, food, health care and entertainment today and compare it to what it was back in the eighties you are likely to be quite surprised at the difference. This is a good exercise to undertake if you are in any doubt about the necessity of earning a decent return on your money now, so it can be of real use in the future.
Investing involves undertaking some financial risk in return for a commensurate reward. Placing money in a savings account or money market account does not classify as investing because there is no substantial risk involved.To earn enough of a return to outpace the rate of inflation you must put your money into more complex instruments.
Bonds, stocks, mutual funds and exchange traded funds are all different investment options with varying degrees of return and risk. It is important to find a suite of investment products that you are comfortable with so that you can put your money to work as hard as you do. This way when the time comes for you to kick back and relax, your portfolio of investments will be able to provide you with the cushion you need to rally you through your golden years.
If inflation was not a real and present danger, investing would not be a crucial part of financial planning. However, since inflation is a part of our reality, we must take steps to ensure that we are prepared to face the future with confidence, which means, we must find a way to invest.