Inflation is a buzzword in 2022. Prices creep up a little each year, but this year’s inflation has hit record highs around the world. Money sitting in your bank account loses value and its purchasing power erodes, this year faster than ever. So what’s the solution?
You need to ensure that any savings you have are invested. In a regular year, the Bank of Israel aims not to pass 3% inflation. That means that each year, money sitting in your bank account will be worth 3% less than 12 months prior.
Now you might be thinking “But investing is RISKY! It’s just like gambling. I don’t want to lose all of my hard earned money. I don’t want to invest.” Guess what? If you are or ever have been employed in Israel, you already are an investor. Mazal tov! Your pension is invested. If you are fortunate enough to have a Keren Hishtalmut, that’s invested too. Not only are you an investor, so are your kids and every child in Israel, as they all now have savings plans from the government, which all are invested. All of these accounts grow over time through the magic of compound interest. The guaranteed way to lose the value of your money is not to invest.
It is believed that Albert Einstein once said “Compound interest is the eighth wonder of the world. He who understands it, earns it; he who doesn’t, pays it”.
If you take a loan from the bank, you pay the bank interest every month for using their money. The amount you repay is higher than the amount you borrowed. The higher the interest rate, the more you repay.
Compound interest in investments works similarly, except that you are the one earning the interest.
To simplify: If you invest 100 shekel at a 5% interest rate, you will have 105 shekels one year later. Provided that you don’t touch it, the following year, you will earn 5% of 105 shekels, leaving you with 110.25 shekels, etc. This works with any amount. 100K turns into 105K turns into 110,250 shekels and so on. This is how your money works for you, how you beat inflation and how you grow your wealth.
By paying yourself first and having investments as part of your budget, the money you save today will be worth considerably more in the future. For example, by investing 100 shekels per month for 13 years at a 7% average interest rate, you will have 24,000 shekels by the time your child becomes bar mitzvah. Many people take loans to cover simchas and pay compound interest to the bank. You will be doing the opposite! Feel free to play around with our favorite compound interest calculator. Ignore the currency. The math works the same.
We have both been judged for our “stinginess”. Coworkers have called us cheap and claimed that because we don’t spend lots of money, we must not enjoy life.
Everyone has different priorities for how they spend their money. Trying to live by what your friends or colleagues have will not keep you happy long term. Years from now, you will be financially sound while they will be paying down debt. Of course not all investment opportunities are equal and some are much riskier than others. In future posts, we will dive into the different investment options out there, so you can decide what’s best for you.
Save and invest for your future. It’s what’s right.
Where would you like to be financially in 10-15 years from now? How do you plan to get there?
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