Basics of Investing: What Does Investing Mean?
“Poor people see a dollar as a dollar to trade for something they want right now. Rich people see every dollar as a ‘seed’ that can be planted to earn a hundred more dollars … then replanted to earn a thousand more dollars.” — T. Harv Eker, Secrets of the Millionaire Mind
You may have come across some version of the story below, but it’s worth retelling.
A farmer gave his two sons an equal number of seeds. One of the sons just sold them to buy necessities for his home. The other son, however, made the more difficult choice to sow the seeds. At the end of the season, he harvested the crop and sold the produce in the market at a high price, making a profit. With that money he again bought seeds and sowed them successfully, continuing the cycle.
The process of investing is similar to the process of sowing and harvesting.
Idle money (that is money just lying in your wallet or savings account) doesn’t bring any benefit to you. It is a lost opportunity as your funds don’t grow over time.
However, if you invest your savings, your money grows. The compounding of returns is the secret to making money grow when it’s invested. Through this brief article we wish to explore the basic concept of investing and why it is important.
What does investing mean, really?
The wealth of a person doesn’t depend upon how much they earn. Rather, it is dependent on how they invest the money that they earn.
In literal terms, investing means allocating money in expectation of some benefit or returns. Investing is a mechanism where a principal sum of money appreciates to either grow in value and/or generates future income.
This allocation of money can be in government saving schemes, new business, the stock market, or even new alternative investment mechanisms such as cryptocurrencies.
However, it is advisable to analyze our goals and personalities in terms of our risk appetite, before embarking upon this journey.
Investing is also about protecting your money, not just growing it
While the idea of retiring rich or creating a large fund is closely associated to investing, that’s not all it’s about. The idea of investing does not just apply to the context of making more money or growing your money.
Investing also has a lot to do with protecting your money from inflation. When you don't invest your money, and it’s simply sitting in a zero or low interest fund, you end up losing money.
Thanks to inflation, every $1 or ₹1 today, is going to be worth less tomorrow. When held in cash (or some other asset that has a low rate of return), our money is constantly eroding value. Over time, that same $1 or ₹1 could become worth very little.
If you look back, you will see the same scenario: the buying power of a unit of currency was much higher 20 years ago. 20 years from now, the exact same thing will happen with your cash as well.
Investing has a lot to do with protecting the value of your money; to make sure that inflation doesn't eat up the value of what you can buy with that money.
So while investing wisely by putting your money in the right places is one of the best ways to grow money, we need to be mindful that protecting its buying power is also a function of investing.
The idea is that your money works for you while you are at work, or asleep at home. It’s similar to the idea of you hiring someone to work on your behalf, and their bringing in profits for you. So while you are earning from your primary income, your investment is working (24 hours) alongside you as well.
If you want to learn more about investing...
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Disclaimer: This article is for educational purposes only. It should not be considered financial or legal advice. Please consult a financial professional before making any significant financial decisions.