6 Excellent Reasons to Invest for the Long-Term

What are the reasons to invest money? Investing money is the most assured way to increase your wealth over the long term. Unlike the lottery or gambling, or inheritance, or becoming famous, investing is a method by which everyone can use to build wealth. The reasons for investing are many. Let’s examine some of them in detail.

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Reasons to Invest for Retirement

We invest now so that later we have the freedom of choice that being financially grounded brings. When you reach “retirement age” you want the ability to choose whether or not you want to keep working or have to keep working.

Some people choose to spend as the money comes in. They rationalize it by saying things such as “you can’t take it with you” or “I want to enjoy it while I’m young”. These people have what I call the grasshopper mentality. They live for the now and never concern themselves with the future. This naming comes from Aesop’s fable, The Ants & the Grasshopper, found in the Library of Congress.

One bright day in late autumn a family of Ants was bustling about in the warm sunshine, drying out the grain they had stored during the summer, when a starving Grasshopper, his fiddle under his arm, came up and humbly begged for a bit to eat.

“What!” cried the Ants in surprise, “haven’t you stored anything away for the winter? What in the world were you doing all last summer?”

“I didn’t have time to store up any food,” whined the Grasshopper; “I was so busy making music that before I knew it the summer was gone.”

The Ants shrugged their shoulders in disgust.

“Making music, were you?” they cried. “Very well; now dance!” And they turned their backs on the Grasshopper and went on with their work.

There’s a time for work and a time for play.

People that are financially grounded are Ants. We work, save/invest, and play; a healthy balance. As a result, when retirement comes, we’re not fully (or even at all) reliant on the government to take care of us and our standard of living doesn’t change much, if at all.

Reach Financial Goals

Due to the fluctuations in the markets, investing money that will be needed in the short-term is now wise. If however, you won’t need the money for some time, say 5 years or more, then investing that money can work in your favor.

An example of this would be purchasing a home where you want a big down payment (or even to pay in full for the home). You can then systematically invest each month into an index fund, such as the S&P 500 index fund, to grow the money in order to reach your goals faster. Note, you will pay capital gains tax (which as this time is 15%) on the growth when you divest the money for its intended use.

Start a Business

Like the purchase of a home, starting a business can use a lot of capital to get it off the ground and support itself. Whether you are starting a business from scratch or buying into a franchise, there are going to be a lot of initial costs involved. Paying for these costs from cash takes a large amount of the stress off your plate. You will make better decisions without the added stress of needing to make an SBA (Small Business Administration) loan payment and get the business going, versus just getting the business going.

Support Others

Investing money in order to support others, be it relatives or an organization, such as a charity, can be a very worthy cause. Many scholarships are funded by money invested in a trust that uses the growth of the investment to fund the scholarships.

This can also be done to create a stream of income for a charity that you would like to support or a family member that may not have their own means of support.

Passive Income

Creating an additional stream of income that is not reliant on you physically working is a wonderful thing. For me, the biggest lesson learned this past year with COVID is that nothing is certain. We were lucky as neither my wife nor myself lost our jobs, but it is something I did worry about very much. Having a passive income stream to supplement or even replace one of our incomes would be a wonderful thing.

Passive income can be generated from several different sources. From real estate, you can earn rental income. From certain stock/bond/mutual funds, you can earn income through interest or dividend payments you receive. From the ownership of a small business, you can earn money on the profits made.

Invest to Pay for Continuing Education

Do we take out student loans or have our children take out loans to further their education? No one wants to burden their children with debt as soon as they leave home. There are a few investment options for funding education. There is the 529 Plan, the Coverdell ESA (Educational Savings Account), custodial accounts, and brokerage accounts.

The 529 Plan is a tax-advantaged account where you can invest money for future college costs. The 529 is exempt from taxes, provided that the funds are used for qualified expenses. Some 529 plans are state-specific, meaning that you can only use them for certain educational institutes in certain states. If there is money remaining or not used for qualified expenses, there is a 10% penalty on those monies.

The Coverdale ESA is very similar to the Roth IRA, but to be used for qualified educational expenses. All of the growth is tax-free if used for qualified expenses. The maximum allowed to be invested each tax-year is $2,000.The Coverdell ESA does not limit the use of funds to state-specific institutions.

A custodial account is an investment account that is opened on behalf of the child. The work is a normal investment (brokerage) account. Once the child reaches the legal age of adulthood, the custodial account is theirs by law to use how they see fit. The growth is taxed at a capital gains rate in the child’s name.

A brokerage account is your own investment account that is not tied to a retirement vehicle. You can invest in anything allowed by the brokerage firm. Your use of the investment for your child’s education is your own choice. There is no tax advantage to such an account. It is similar to the custodial account except that it is always yours’. The growth is taxed at a capital gains rate in your name.