So let’s learn how and where to spend your salary to become wealthy. We will go deep into the topics of smarter investing and personal finances however let’s first build the foundation. You must clearly understand two concepts, that is Assets and Liabilities to understand investment as a whole.
Assets can be defined as things which have earning power or some other value to their owner. Let me give you few examples, your house is an asset for you because you are living in it, you are getting a value out of it, it’s your shelter. Your Car is also an asset for you.
Can both this house and car be converted into investments?
Yes, of course, it can be. Buy a house and give it on rent, earn from it, it will become an investment.
Rent your car, earn from it, maintain the cash flow, it becomes an investment.
As Robert Kiyosaki says that the rich become richer because they spend their money on assets and the poor become poorer because they waste their money on liabilities. You must understand the difference between assets and liabilities.
Liabilities are described by the Oxford dictionary as a thing for which someone is responsible, especially an amount of money owed: Now continuing with the same example, the house which you bought can also become your liability if you had taken a loan from the bank for buying this house and continue paying the interests whole your life.
It’s very important to understand what actually is an asset for you and what liabilities are. Before spending on any big thing try analysing it whether it’s an asset or a liability.
Of course, buy a house however don’t do it by taking too much loan from the bank that you have to pay the interests whole your life.
I know that it’s quite difficult to buy a good house without taking a loan, by only depending on your salary and this is the reason why I want you all to do investments and maintain the cash flow so that these necessities of yours can be fulfilled without taking any kind of loans from the bank.
“It’s not your salary that makes you rich; it’s your spending habit”
-Charles A Jaffe
Investment…. The word with which we are quite familiar with. We all have come across this word quite a lot of time however only a few of us have dared to dig deep into it, and those few are known as investors. Want to be one? Well, you are on the right platform.
Let’s begin by answering the most fundamental question, what is an investment?
To answer this question let me take Harry’s example. Harry is a software engineer working in an IT firm. The money which he gets at the end of the month as his salary is $6,000. Yes, a handsome amount of money for a bachelor. So at the end of the month, after meeting all his monthly expenses he gets left with $2,000. This two grand is his savings.
If he keeps this amount in his bank, then after one year this $24,000 will grow up to become $26,000, which is calculated taking the average interest rate that banks provide. If we look closely into the figures, Harry gains $2,000 in one complete year.
The savings that he does becomes his investment, as he gains an amount of $2,000 in one complete year after investing $ 24,000. This was a simple example to show what investment is.
Now let’s look how Oxford dictionary defines investment. According to Oxford Dictionary Investment is “A thing that is worth buying because it may be profitable or useful in the future.”
In simple terms, investment is putting aside a resource with a hope that you will gain with it a certain amount in the future. There are many kinds of investments, some have low returns some have high depending on the risk associated with the investment.
Why should I invest?
Well, this is an obvious question which comes to your mind after learning what investment is.
The answer to this question is also very simple, that is to earn more money in future. Wealth creation has become the prime reason for smarter investing. Earning more and raising the standard of living needs investment.
We have always been taught that to earn more money you need to work for more hours and this is quite true, that you need to work for more hours and give in your extra effort to earn an extra amount of money. However there is a limit to it.
You cannot clone yourself, and suddenly work twice as hard at two jobs. Nor can you work 23 hours a day for very long. The solution to this is to encourage your money to actually work for you. Wealthy people don’t work hard they work smart to grow their wealth.
Investment can help you get Financial security and Secured Retirement. Investing efficiently can help you grow your cash reserve which can help you in a case of medical emergencies and fulfill your financial dreams.
Whether you are planning for your future business or for your family, investment has become the key requirement to acquire all your financial needs.
So, take out some money from your salary after meeting your monthly expenses and then invest it in different places (this is diversifying your investments) so that you can lead a financially sound life both before and after retirement. In simple words, you should invest to have a better cash flow throughout your life and get financial freedom. That’s smarter investing.
Another very important reason for smarter investing is the concept of inflation. So inflation is the increase of the price of goods and services. As these keep increasing, the value of your currency equally reduces, therefore lowering your purchasing power, that is you would not be able to purchase as much with the same money as before.
Suppose you stack $100 under the mattress today and inflation is 5% per year. After one year you would be able to buy 5% fewer goods than today. Another way to think of it is that after one year you would require $105 to buy the same stuff that you could buy today with $100.
Now let me show you the impact of inflation in a long run. In a long run, this 5% inflation compounds, making it even worse. There is a very famous quote by Einstein “Compound interest is the eighth wonder of the world. He who understands it earns it…he who doesn’t…pays it”.
When you look at the effect of compounding on this 5% inflation on your $100 after 20 years you would see that the prices would have been more than doubled and you would require $ 265.33 to buy the same stuff which needed $ 100 today.
If you invest $100 today in a stock market that is, you buy a share of a company worth $100. You sell that stock at $103 after 1 month, so now your amount raised by $3 and similarly you can now invest $103 and get back perhaps say $105 after another month.
So, in this scenario, the compounding is in your favour and you can gain by using it wisely. If you consider 25 years from now then all these years your value of $100 also kept on increasing competing with the inflation.
So, what do you think, Isn’t it a better option to beat inflation by using smarter investing principles?