Investing Money

An Introduction to Investment and Personal Financial Planning

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Why Invest?

Money (or the love of it) is said to be the root of all evil, but we can't live without it. Money certainly isn't the most important thing in life, health and happiness come first, but having money can make a huge difference to the freedom we have and the choices we are able to make. If you're poor you probably have to get up way too early and spend you're time working for other people doing things you'd rather not be doing. If you have wealth you can get up when you choose and use your time according to your own wishes. You might not work less, you probably won't, but you'll sure get more satisfaction from what you do.

This article gives some advice on how you can move towards that happy day.

The Importance of Building Assets

There are two categories of money. Assets are a stock that (hopefully) grows over time. Income is a flow, it comes in - from various sources - and goes out in order to meet our various needs and wants. It is important to understand the difference between assets and income.

It is possible, but not wise, to survive entirely without assets. Money comes in, from wages or profit, and it is spent. Should the source of income disappear we are left at the mercy of our particular state welfare scheme, or charity.

The third source of income is from assets. That is money invested in order to generate more money. We shall shortly review the different kinds of investment, but for now let's just note that in these days after the job-for-life era income from assets is the most assured form of income.

Consider two gentlemen. Let's call them Mr A and Mr B. Both earn $50,000pa and need $45,000 to live with enough left over for a few luxuries. Mr A, however, enjoys more than a few luxuries. He spends his surplus $5,000 on eating out, attending concerts, upgrading his car every year etc etc. Mr B uses his surplus to build income-producing assets. Mr A's assets remain at zero, while every year Mr B's increase in both capital value and income produced. Initially, Mr B re-invests the income from his assets in further assets, thus making them grow exponentially.

After a few years Mr A still has no assets, whereas Mr B has acquired a substantial holding. Mr A still has to get up early to spend his days doing something he'd rather not be doing to make ends meet. Mr B has built his assets to the point where they produce more income than Mr A's wages, and both income and capital continue to grow every year. You get the point.

In the long run investment in stocks produces a very healthy return - better than just about any other investment class - especially aided by the compounding effect of re-investment. And you don't even have to pick stocks or monitor markets, just buy sensibly and hold. Consider the inspirational example of Anne Scheiber. In 1944 this 44-year IRS employee invested $5000 in blue chip stocks such as PepsiCo, Schering-Plough, and Chrysler, re-investing dividend income. When she passed away in 1995 her $5000 had grown to a massive $20 million.

The importance of building assets is described brilliantly in Robert Kiyosaki's masterpiece Rich Dad, Poor Dad.

Why do YOU Want to Invest?

We all want and need money for different reasons. It might be to put a deposit on a house, put our kids through college, take the trip of a life time, retire early etc etc. There are as many different reasons as there are people. What's important is to identify YOUR reasons. Once you discover how to invest money, and develop your own personal investment strategy, it is your reasons for investing that will help keep you to your strategy rather than straying from it in favor of some short-lived gratification, like a visit to the sushi shop rather than a microwaved ready-meal.

What is Investment?

Investment is the forgoing of utility or pleasure that might have been derived from money in the short term in order to generate greater and/or more sustainable utility or pleasure in future. An extremely simple example: I can choose to eat out today, or I can save the money I'd spend doing so in order to be able to eat out every week in a few years time.

It can be seen that investment takes a certain amount of discipline. Hence the need to maintain the motivation that comes from defining your own personal financial goals.

Further Reading