Why invest? This is a question that is raised by many people. To some; investing is absolutely essential, to others; it might seem something that only business minded people do. But ultimately everyone, (no matter who you are) should invest. If we want to live the life we all desire and deserve, we need to be able to master all four quadrants of our life: Our Health, Spirituality, Relationships and our Finances. Life should be abundant in all four quadrants of your life, and no quadrant is any less, or greater than the other. If you are not abundant in one of these four areas; it is like trying to drive a car with one wheel missing. In order to create balance in your life, you need to be able to master every one of them, and investing gives you the ability to have abundance in your finances.
Why does it Pay to Invest?
To make more money you must invest; whether that be your money, time or resources. In your current job, you most likely invest your time and resources in exchange for money, however once you finish work there is no residual income which generates money for you passively. That means that in order to sustain your living standard, you must work to pay for living expenses. This is the most common trap that people fall into.
Because the majority of people do not invest their money into something that will provide a residual (or passive) income, they must continue to work to sustain the living standard. If they do not invest enough time, money or resources into something that will create Passive Income, then they have to either continue working or lower their living standard.
Another factor which shows the importance of investing is that; in order for you to create more money (to live an abundant life and have everything you want), you must exchange something of value. And in most cases creating enough value is somewhat difficult for the majority of people as they can only exchange their skills or time for money. This is where investing comes in.
Investing allows you to leverage both your time, and your resources. Instead of going to work and exchanging your time for money, you can use your money to exchange for time, and use your money to create additional value in something where it will give you a return. The general rule of thumb is, the more you invest, the greater return.
What does investing involve?
Before you go out and start throwing your money into any investment you can find, you must understand the two factors of Investing:
-
1. Intrinsic Value
-
2. Time Value
Intrinsic Value
Intrinsic Value is the actual value of the underlying asset given by supply and demand. For example: a house might have a current intrinsic value of $100,000 due to the cost of the building materials and the demand for the area in which the land is situated. The intrinsic value of the asset in this case would be represented by the building materials and the supply and demand of the houses in the area.
Intrinsic values can differ due to the factors of the investment: i.e. the building materials which are used to construct the house depreciate (lose their value), however the land on which the house is built appreciates (increases in value) due to supply and demand of the area. Meaning that new houses are valued higher than old houses due to the age of materials, but the value of the land will fluctuate and either increases or decrease due to the supply and demand of the area. If demand is greater than the supply available, then the price of the property will rise. If supply is greater than demand, then the price of the property will fall.
Commonly, when you invest in something, you will take the intrinsic value as the largest factor involved. In other words if a house has an intrinsic value of $100,000 you believe that the investment is worth $100,000, however there is another factor that will play in the value of the investment or asset.
Time Value
If we compared two properties, where each property reached a stable supply and demand level, and the building materials of the property were of equal value, then time value will still play a factor in the increase or decrease the price of the property, and this due to inflation.
When we buy a house we are using a universally accepted means of exchange; which is money. Because the value of money is consistently changing, it is in most cases preferable to have money now rather than later. The potential to create more money with what you have now is almost unlimited, and if you restrict what you have now, you are also restricting what you will have in the future. What does this mean? What this means is that $100 today might not have the same value as $100 in one years time. If you had invested $100 today, it might turn into $200 in one year, where as if you had waited until the end of the year to receive your $100 you might only have $100 with inflation.
What is inflation and how does it affect my investments?
Inflation is the increases of cost, which creates a decrease in the value of money. You may have noticed that $10 doesn’t have the same value as it might have had ten or twenty years ago. As the saying goes “if you don’t use it, you’ll lose it”. This applies the same for the value of money. Because inflation is a factor in the value of money, in order to preserve the money that you have, you must invest it at the same rate or a greater rate in which the inflation is. Otherwise the buying power of your money will soon decrease as the cost of living increases.
Should I be more concerned with Intrinsic Value or Time Value?
Both Intrinsic value and Time value play large roles in the price of an asset, however in many cases time value is worth more than the intrinsic value. The reason for this is because we are living things that are restricted by time i.e our life; as each of us only has a certain amount of time left to live.
If you asked many old millionaires or billionaires if they would give up their fortune to be young again they would most likely say yes. This is because they have a large perception of time value. They would pay a large sum for the ability to have time. The only problem is that it is impossible (as we know of it today anyway) to gain back time. Until we are capable of gaining back time, we must utilize the time in which we have and use leverage by investing.
You may continue to create more money through work however this will lead you into a continuous cycle of working for money instead of having money work for you. If you do not invest, you will not have any additional sources of income which means that when you cease to work you will have nothing to cover you living expenses.
Most governments encourage investing through a retirement account (superannuation or 401k) as a way to cover your living expenses once you retire, however for many people it is difficult to gain a sufficient amount to retire on because they have a small income and the returns for retirement accounts are minimal. For the majority of the population, they must rely on the pension or something similar which will be made obsolete in the near future due to the increase in population during the period between 1946 to 1964 known as the ‘baby boomers’. The reason for this is simply because there will be too many people retiring at the same time and not enough workers to fund them. Governments have warned about this crisis on many occasions however there hasn’t been any substantial action towards educating the population towards financial independence.
Having an understanding of why you should invest is essential to everyone wishing to live an independent and wealthy life in all aspects. Instead of working hard our whole lives and taking small holidays every now and then, living above our means because we want more, and finally retiring on government payouts (if they are still available), investing allows you to work less and enjoy life while you live it rather than working your whole life; only to retire old and frail where you can’t do the things you have always wanted anyway. Investing gives you the chance to support your family and give them the best opportunity in life, as well as share and help the world to be a better place.
Remember that whether or not you decide to invest, your personal time value is becoming less and less. Each day that goes by is one less you could have experienced living your dreams. Choose to educate yourself and change your life to create a life of wealth and abundance.
