We're all taught that saving is a crucial component of sound personal financial management and a comfortable retirement. But perhaps we should be getting taught about the benefits of investing in ASX shares instead.
Make no mistake, a good savings habit is the foundation of building wealth. You can't get wealthier by spending every dollar that's coming through your door, after all.
But it's only one step to truly harnessing the power of investing. Saving alone won't get you to a comfortable retirement. It probably won't even protect your money from the corrosive effects of inflation.
Think about it. We found out last week that inflation in the Australian economy is cooling, but still running at an annualised 6%. Right now, you can't even find a bank account or term deposit that will pay you an interest rate that high.
Even if you bag a savings account with a 5% interest rate, you're money is still losing 1% per year in real purchasing power. And that's before you pay your tax on the interest the account pays you.
So forget saving for your retirement. I'd be buying undervalued ASX shares instead.
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How can ASX shares help with saving for retirement?
Unlike cash assets, ASX shares can demonstrate a long history of beating inflation and growing and compounding wealth in real terms.
To illustrate, let's look at an ASX index fund. The Vanguard Australian Shares Index ETF (ASX: VAS) has been around since May 2009. Since that time, its investors have enjoyed an average annual return of 8.79% per annum (up to 30 June 2023), including both capital growth and dividend returns.
Thus, even a simple, easy-to-invest-in index fund like this Vanguard fund can help you to harness the power of compounding for retirement in a way that saving alone cannot.
But you can do even better by investing in cheap individual ASX shares. Finding an ASX share that is both cheap and a high-quality business is difficult. But it is not impossible.
Take National Australia Bank Ltd (ASX: NAB). I regard NAB as one of the strongest companies on the ASX, thanks to its status as one of the big four banks. Today, NAB shares closed at $28.58 each. But back in early June, the bank hit a new 52-week low of $25.10:
This was clearly a great price to buy some NAB shares, as the bank has already bounced a good 13.5% or so off of those lows. That's more than the average annual return of our VAS ETF.
As such, you can boost your returns (and your retirement) even more by looking out for bargains like this that the ASX periodically serves up.
Being a good saver is a great start to obtaining financial independence and a comfortable retirement. But investing in ASX shares can get you to the end with time to spare.
