So you just saw a short on YouTube about a teenager earning “millions” from the stock market, or a friend told you that you must start investing to prepare for the future, or you read about Warren Buffet and his value investing techniques, or saw your zero bank balance or maxed out credit card and are now crying over your impulsive hand- whatever be the reason, you have now started taking investing seriously and are even contemplating to invest. But you still aren't completely convinced yet. A few questions are nagging you and you are in half a mind to procrastinate investing to a later date, just like you always do. But let me stop you right there.
Do not procrastinate investing. Let me convince you why you must invest:
1. You really don’t have a choice:
Did it scare you? If yes, good. Because you should be scared if you still haven't started investing yet. Let me explain.
Even if you are only barely educated, you must have heard of something called inflation. Every politician speaks about it and every citizen worries about it. Inflation is basically a rise in prices of things- of anything and all the things. It affects some things more than others, based on the demand and supply of each item. But in the end, it leads to a rise of the prices of those items. This essentially means that something you could buy now for $1 may be priced at $1.20 in a year. This means a 20% inflation rate for that item.
Inflation doesn’t just mean rise in prices; it also means a decline in your purchasing power. For the example above, the item that you could buy today for $1, you will not be able to buy for the same price in a year- which means that your $1 bill is “weaker” compared to that item in the future. So, your cash is actually getting weaker with time, meaning you can buy less and less with the same $1 bill as time passes. This doesn’t just happen to your $1 bill, but to all your money. Even if you feel you are earning comfortably more than you spend and you don’t really need to invest- you can just stash all your cash or let it remain in your bank account- think again.
Say the inflation rate in your country is 5% and your bank pays you 2.5% on your savings account, your money is actually “degrowing” at a 2.5% rate (it isn’t exactly 2.5% in reality but close enough so go with it). And the less said about your cash, the better. It is “degrowing” at the rate of inflation. So if you don’t invest, you are essentially losing your money, at a slow or fast rate, based on where you kept it, but it is going away. You are getting poorer.
But you don’t want that, do you? Only when you invest in an instrument that is able to generate returns higher than the rate of inflation, your money is actually growing at a “real rate of return” which adjusts inflation rate with you theoretical rate of return.
Hence, the tile stands. You don’t really have a choice because this monster called inflation is nibbling away at your hard-earned cash and you cannot save it unless you use a magical sword called “investing”. Cringy but true..
2. Money works for you:
Warren Buffett once said:
If you plan on working till you die and are okay with it, skip this post and this website; go do your job. But if you are of the opinion that your time is more precious than money, then it is time to realize that the only way you can move forward is to create a system where your money “works for you”. This means that your money participates in an economic activity, be it a company or real estate or gold or a bank deposit, without your active involvement. So when that economic activity grows – as companies and gold prices and real estate prices often do- your invested money grows with it.
And with it, your own wealth and net worth. You get rich. Isn’t that neat?
3. Build wealth by the power of compounding:
Investing wouldn’t be as attractive if it were not for the power of compounding. So what is the power of compounding? Let me explain.
Say you have a hundred dollars. You invest it in an instrument with “real rate of return” of 10%, so this rate is what you get each year over and above inflation.
In year 1, your money becomes $100*10%= $110
In year 2, it becomes $110 * 10% = $121
In year 3, it becomes $121 * 10%= $133.1
In year 4, it becomes $133.1 * 10% = $146.4
You can go on but let me point some important points. In the first year, you made $10, which was10% of your initial capital. But in year 2, you earned $121-$110= $11, which is actually…
10% of your (initial capital ($100) + the interest you earned in the first year ($10))
So you are earning money not just on your own money but the money you actually made in the previous year. Similarly in year 3, you are making money not just on your initial capital, but also on the returns of the past 2 years.
(Important caveat: All this happens only if you let your interest get “reinvested” in the instrument. If you take out the $10 in the first year itself, you only get 10% of $100 in the 2nd year)
Power of compounding is basically growing your money exponentially by continuing to reinvest your returns. And it really is exponential. If you did the investment mentioned above for 20 years, you know how much you will make? A whooping $673. It doesn’t look a lot but imagine if this was $1000 and you didn’t just it once but continued to do it every month or year for many years! You can actually get wealthy.
Remember though, that the power of compounding rests on the assumption that you are able to give it time. Nothing is more important than time in this whole process, so the longer you do it, the better it gets. This also means the sooner you do it, the better it gets. So, unless you are able to get viral overnight or put in the long hours to master a skill or grow a business or just marry well or are born to the right family, there aren’t many legal and ethical ways to get wealthy other than investing.
Bottom line:
With inflation eating away at your money, it is imperative to find ways to grow your money faster than inflation. Investing can help you with that. Investing can be risky at times, and there are uncertainties, and if you treat it like a gamble, it is bound to scar you for life. But if you do it sanely without being too greedy or too impulsive and give it time, it can create more wealth than you might think.
Yes, not all investments work the way you want. It is a game of probabilities and yes, you can’t really predict the future, but remember this- If you don’t invest, the probabilities are100% stacked against you.
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