2021 may be the perfect year to begin investing.
As we wrap up 2020, the worst days of COVID-19 are nearing an end. Though the stock market took a severe hit this year with the economic shutdown, many investors predict a significant upswing in 2021 as normalcy slowly returns and new norms begin to take shape.
If you have extra cash lying around after contributing funds to savings, financial planners recommend investing it rather than keeping it in a savings account.
Read ahead to learn why you should invest extra cash in 2021 and what investment strategists are predicting about the new year’s stock trends.
Saving vs. Investing Extra Cash
Before we dive into why you should invest your extra cash, let’s talk about the difference between saving and investing.
Saving money is the process of putting your funds in a savings account or security. The money you deposit into a savings account has no risk of decreasing over time, and it’ll likely earn a small amount of interest each month.
You can withdraw your savings in a short amount of time with no or minimal fees. As a result, you can have access to the money you put into savings on short notice, such as during an emergency.
On the other hand, investing in the process of purchasing assets that you expect to increase in value over time. Investors buy stocks, bonds, and other financial products to grow their money through interest, dividends, and asset appreciation.
Earning a return on your investment is a slow process–you may end up leaving your money alone for a decade or more before cashing out. Similarly, the funds you use to purchase assets will be unavailable to you until you decide to liquidate–a decision that requires strategic planning and careful examination of market trends.
However, investing can be a highly profitable act that grows your money over time.
Of course, you should save plenty of money to have a generous cushion to fall back on in an emergency. Most financial planners recommend keeping enough funds in your savings to cover at least three to six months of expenses.
But any extra cash you have lying around should be working for you rather than sitting stagnant in your account.
Whether you have decided to invest $20k intelligently or are looking to purchase a few hundred dollars in stocks now and then, investing your extra cash can be the smartest financial move you make in 2021.
Five Reasons to Invest Extra Cash in 2021
1. Investing Overrides Inflation
Inflation is the decline in purchasing power that occurs when the cost-of-living increases. The value of a currency tends to decrease over time, while the cost of select goods and services rises. As a result, what $100 could buy you today may only cover $90 worth of goods in a few years.
Money that you have socked away in a savings account is subject to inflation. In other words, unless the interest rate on your savings account matches the inflation rate, your savings will lose value over time.
Historically, interest and inflation rates have had a converse relationship–when one increases, the other decreases, and vice versa. The harsh reality is that your savings will probably decrease in value as the years go on.
Investing your extra cash gives you a better chance of overriding the loss of value that comes with inflation. Earnings tend to increase faster in the stock market than the inflation rate increases, so you can expect your investment to be worth more when you liquidate it than when you first purchased it.
2. Investing Can Help You Rebuild the Funds You Lost in 2020
Most people can agree that 2020 was a challenging year for personal finance. You may have thrown your savings goals out the window in the interest of getting through the economic shutdown or a period of unemployment.
Investing your extra cash in 2021 is an excellent way to get back on track with your financial goals and rebuild your lost funds. Even if you already own assets, putting a bit more money into the stock market rather than spending it can eventually give your savings the extra boost it needs.
Additionally, if you experience a personal financial hit during 2020, that could mean that you have adjusted to living on a lower income. If your finances stabilize after the pandemic, you could put your additional income toward investments without changing your spending habits. Over the next decade or so, that money could double in value, making up for your lost funds this year.
3. The COVID-19 Vaccine (& Other Factors) Could Boost the Stock Market
Investment strategists predict a “huge boom” in the stock market towards the second quarter of 2021. Several factors could contribute to this upswing, but the most significant one is the anticipated COVID-19 vaccine.
COVID-19 has negatively affected the stock market since March, at which time the market plunged by 26% over four trading days. The initial fear of the virus led many investors to sell their shares quickly, and growing uncertainty kept many from trading or purchasing.
Though investors have seen positive trends in the market toward the end of 2020, it may take several months before the market resembles its pre-COVID status. The market may not even out until the world recovers from all of the sudden changes COVID-19 made to daily life.
However, some market strategists believe that the COVID-19 vaccine could jumpstart a fast-track to market recovery. A vaccine may trigger the end of the pandemic and return the country to its pre-COVID state.
Other factors, such as President-elect Biden’s inauguration in January, could also trigger an upswing in stock prices.
Of course, some daily life changes, such as the rise in employees working from home, may become permanent even after the pandemic ends. However, we can expect market volatility to decrease overall as Americans adjust to these new norms.
Overall, analysts predict the market to grow as we enter 2021, making the beginning of the year an excellent time to purchase stocks.
4. Investing Can Help Get the Economy Back On Track
There’s no doubt that the economy took a toll during the worst weeks of the pandemic. Businesses shut down for a month or more, and consumers stopped purchasing products, eating at restaurants, and circulating as much money as usual.
Though the stock market and the economy are two different entities, they tend to impact each other. Buying and trading stocks is an excellent way to support businesses, especially ones that suffered during the pandemic, by providing them with capital to pay off debt and purchase supplies.
Stock market trends also have a psychological impact on consumers and businesses. Bull markets can raise confidence about the economy’s health, encourage investors to buy stocks, and even persuade consumers to make big purchases. Bear markets tend to have the opposite effect on spending.
As the stock market improves near the end of the pandemic, the economy will likely begin to improve as well. Your contribution to the market will add to consumer confidence and help get the economy back to its previously stable state.
5. Long-Term Investments Typically Become Profitable
Each year brings a new set of changes to the economy, and 2020 happened to see the most prominent market crash in a while. However, seasoned investors know that although stock prices may fluctuate over time, market trends show that stocks typically become profitable in the long-term.
Stocks tend to experience volatility, a statistical measure referring to how wide an asset swings in either direction of the mean price. As opposed to other financial products, stocks fluctuate in price regularly and significantly–2020 saw a substantial fall in stock market prices over just a few days.
However, despite their volatility, stock prices historically outperform other securities over long-term periods, meaning ten years or more. Crashes like the one in 2020 become insignificant when you view market trends over several years—the DJIA’s 100-year stock chart shows a steady increase in prices over this time.
Though the future is unpredictable, purchasing stocks in 2021 with plans to keep them for a decade or more will most likely result in market gains.
Almost everyone can agree that 2020 was a rough year. The economy took a severe hit, and the unpredictable nature of 2021 may discourage you from investing in stocks until the pandemic is far behind us.
However, now is an excellent time to begin investing your extra cash rather than keeping it hidden away in a savings account. Investing helps your money actively increase in value rather than decrease with inflation rates.
Though 2021 will likely throw financial curveballs our way, investment strategists predict a boost to market prices with the release of the COVID-19 vaccine and the new Biden presidency. Investing could help you rebuild the savings you lost this year, support the economy, and bring you profits in the long-term.
What extra cash will you set aside for investment in 2021?