Why should you invest?

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Over the last few years, I’ve asked myself the question “Should I buy this stock/ETF/Index Fund?” many a times. It’s not easy making such decisions and you’d probably find thousands of articles both in favor and against your decision. To make this decision easier, let us focus on the why (why should you invest)instead of focusing on the what (what stock should you buy) [1].

Let us zoom out for a second look at the lifespan of an average person. I’m generalizing a lot of things for the sake of simplicity.

  1. The first 25 years - Very little income; mostly spend time learning.
  2. Next 30 years - The earning period.
  3. Last 30 years - No income; spend money earned in the previous 30 years.

How much do we need for the last 30 years?
Here are my rough numbers (again lots of generalization for the sake of simplicity). An annual expense of roughly 70,000$ per year (considering the inflation rate). This would mean that you’d need 2.1 million dollars. Adding a little buffer, this comes to $2.5 million dollars. If you need 2.5 million dollars by the time you retire, you need to save roughly $80,000 for 30 years. For most of us, saving $80,000 a year is impossible (at least at the start of our career).

The goal of investment is to make sure that you’ve enough money to spend the last 30 years. In other words, it is to make sure that you don’t die poor.

Compound Interest - I think this is where Compound Interest enters and does the magic. If you can invest roughly $20,000 a year (as opposed to $80,000 previously) and invest in something that would give you an 8% annual return approximately, then at the end of 30 years you would end up with roughly $2.5 million dollars. See the image below and this is the Google Sheets link to my Excel sheet if you want to copy it and tinker with it.

Google Sheets
Google Sheets

Does buying a house count as an investment?
As you need a house to stay till the end, the answer is a simple No.

Nowadays when I need to make a decision on whether to buy a stock/ETF/Index Fund, I ask myself the following questions and thereby making the decision easier.

  1. Would I be comfortable holding this for the next few years?
  2. How often I’d be monitoring it?
  3. What’s the maintenance cost?

Happy investing.

[1] Start With Why

Kaushik Rangadurai

Code. Learn. Explore

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