What is an investment?
An investment is a way to utilize your cash with the goal of generating future benefit. This future benefit can come in the form of generated income or capital appreciation.
Depositing money in a bank account with interest is an investment that will generate income for you through interest. Buying shares in a company is another form of investment that’s expected to either generate income through dividends or appreciation of the company’s value.
Other investments include investing in certificates of deposits, real estate, gold and many more. With a well planned investment strategy, you can make significant gains, and let your money work for you.
How do investments work?
In simple terms, investing works when you buy an asset at a low price and sell it at a higher price. The return on your investment is called a capital gain. Earning returns by selling assets for a profit is how people make money through investing. Here are some examples:
- A stock price can appreciate when a company releases a new product or increases the company’s revenues.
- Gold might appreciate when the U.S. Dollar loses value, driving up demand for crypto.
- An apartment might appreciate in value because you renovated the property, or because the area became more trendy for newly weds.
Why should I invest?
Protect yourself from inflation
One of the most important reasons to invest is this – a unit of currency tomorrow is worth less than it’s worth today. This is because inflation erodes the value of money over time. To protect yourself from this, one of the best things you can do is invest.
Reach your financial goals
When you think about your future, how many of your goals and dreams are going to cost you money? Probably a big chunk of them. Investing is a great tool to help you generate more money to achieve your financial goals.
Benefit from compound interest
Compound interest is basically interest on the interest you receive, which multiplies your money at an accelerated rate. It is one of the most powerful elements of investing.
Compounding is similar to a snowball effect. As the snowball rolls down, it collects more snow, increasing the overall size of the snowball. The larger the size of the snowball, the more snow it will collect, increasing at an exponential rate. Once a snowball has gained enough size and momentum, there’s no stopping it – just like a good investment.
Now for a real example: let’s say you invest $1,000 in a mutual fund that earns 10% annually for two years. While it might seem like you would earn $100 per year, you would actually earn more with compounding.
After the first year, your $1,000 investment would be worth $1,100. By the end of the second year, your $1,100 investment would grow to $1,210 – meaning it increased by $110. If you leave that investment alone and it continues to grow at the same 10% rate, you would have $17,449 after 30 years.
Investing, as with anything in life, benefits from an early start. Investing has nothing to do with how much money you have – you can invest with as much or as little as you prefer. Regardless of how much you start off with – the earlier you start, the more time your money will have to grow.