Here is a riddle for you. What is something that no one can see or touch and no one acknowledges, and yet it affects your entire life?
Give up?
The answer is inflation.
Here’s how inflation works.
Let’s imagine that I ask to borrow $1,000 from you and I tell you that in return I would pay you back $977 next year. Would you do it?
The problem is that this is exactly what most Americans are doing with their money.
Right now the annual inflation rate in the US, as of Q4 2018 is 2.3 percent. That means that if your paycheck was around $3,000 this time last year, that $3,000 is now worth $2,931. You have effectively lost $69 per paycheck.
Unless you got a pay raise from your job at the end of last year, or you made more in your business, you have actually taken a pay cut.
Why Should I Invest?
So what happens if you cannot count on your job to continue to increase your salary, or if you want to make more money and enjoy all of the staples of wealth instead of just keeping up with inflation?
What happens if someday, God forbid, you want to retire?
Unless something changes drastically in the next few years, you will need to invest. Investing allows you to take your money and multiply it.
Let’s imagine that I now ask to borrow $1,000 today, and I promise to pay you back $2,000 next year. That sounds a lot better, right?
I am basically asking you to invest in me, and in return I will double your investment. Sure, there is a risk that I will not pay back the money, depending on what kind of person I am and whether something goes horribly wrong in my life that year.
However, if you are pretty sure I am a trustworthy person, and you are confident I am going to stay solid on my promise, that is a pretty awesome investment.
When you invest, your money is literally making more money for you. Who doesn’t want that?
Whereas, if you stash your dollar bills in a mattress, or bury it underground, that cash will depreciate over time.
If you slice open your mattress and invest that money, you can expect a different return depending on how you invest.
If you invest your money in an average savings account with a bank, you can expect a an Annual Percentage Yield (the yearly return on investment) of around 0.08%. That is not ideal considering inflation is 2.3%.
If you invest it in a bank Certificate of Deposit (CD) , your APY is likely to be somewhere between 0.35% and 3.10% APY, depending on the amount and the length of your deposit.
If you put your money away in a Money Market account, you can expect a return of between 0.01% and 0.50%, depending on the amount you deposit.
If you invest in the stock market, the amount you make in return varies dramatically depending on the value of the shares of the companies you invest in.
As you can see, there are about a thousand ways that you can invest.
You can also invest your money in various markets other than the financial market.
For instance, you can invest in property and expect a handsome return if your properties appreciate.
You can also invest in the bond market, which are basically loans governments and large corporations use to take on large projects.
Or, you could go ultra high tech and invest in the newfangled cryptocurrency market.
Heck, you can even invest in other people’s delinquent debt.
It’s a Little Like a Casino
If all this talk of speculation, odds and returns has you imaging a Vegas style casino, that's because that is basically what it is.
If you have ever been to Vegas, you may have noticed that often the people who win big are also the people who put the most in and take the biggest risks. This is also true of the biggest losers.
The same is true for investing.
Generally, the riskier the investment the more insane the potential return. The more tried and true the investment, the more steady and less dramatic the return.
For example, someone who invests their money in cryptocurrency, for instance, could either go bankrupt or become a millionaire by the end of the month.
Likewise, some people who became early stage investors in Silicon Valley tech startups are now millionaires, while others did not see any return on their investment.
Meanwhile, someone who puts their money in a bank savings account, on the other hand, can pretty much count on getting around a 1% return on their investment no matter what happens with the market, because it is federally backed by the FDIC.
Most people invest in retirement plans like 401Ks, Roth 401K, and IRA and Roth IRAs.
Because most people are not gifted financially, they typically hire professional financial planners to help them diversity their portfolios and manage their money.
From making regular contributions and hiring money management services, you can expect an average of about a 5% to 8% return per year.
Which One Should I invest In?
That is a question on which the entire financial planning industry relies. The answer is, of course, that depends.
For starters, it depends on who you are and what you want to do.
If you are in your 40's and are looking to put away money so that you can enjoy a secure retirement, you make a decent 70K or so per year at a corporate job, you may consider setting up a 401K and asking if your employer provides “matching funds.”
However, the advice you get on this matter will vary depending on which experts you ask.
If your goal is to make a ton of money so that you can have more freedom in the near future. For that you are probably looking at starting a business or making side income, and investing your wealth in things like the stock market, the property market, businesses, etc.
This way, you make extra income, and your money is hard at work making an extra income for you.
This is the difference between someone who lives paycheck to paycheck and someone who is in control of their money and is insulated from life’s “oh shits!”
Another good rule of thumb to follow when it comes to your investment fund is to never put all your eggs in one basket. The more diverse your portfolio, the less likely you are to lose all of your money when something goes awry in a particular market.
When should I start investing?
There’s no time like the present.
Although, the first thing you should consider doing is getting rid of the debt in your life.
Debt is sort of the antithesis of investing. Debt is when credit card and lending companies make an investment in you, and get an outrageous return on investment at your expense.
Think about it, even if you are making a pretty decent return on your investments at around 10% per year, and the APR (annual percentage rate) on your credit cards is around 16%, you are actually losing money.
Likewise, if you are making 10% and your mortgage has a 4% interest rate, you are effectively getting a 6% return.
According to new studies, the average American carries about $134,058 in debt, and does not have money set aside for a $400 emergency.
Be one of the Americans that bucks the trend. Tell your lenders, “thank you very much for your investment," payoff your debt and start investing for yourself instead.
How Do You Win the Game of Investing?
This is literally the million dollar question.
The problem is that no one knows. No one. Those who claim to have the answers are probably lying.
The problem with investing in private companies is that anything can go wrong. Companies go under, markets can plummet, identities can be stolen, or worse things can happen.
In fact, each of these things will probably happen more than once during your lifetime.
The trick is to not let it keep you from playing the game, because this is a game that your future depends on.
Remember that from every horrible thing that can cause you to lose your money comes another opportunity. After the crash in 2008 emerged a stock market that is growing like gangbusters.
And that stock market will probably crash again, hard. Actually, it could crash any day now. But after it does, more opportunities will emerge.
It is not a perfect system by any stretch of the imagination, but it is the one we live in. And, if you play the system, it can work for you, big time.
Are you confused about where to get started, or about how to ditch debt and start investing in your future? No problem. One of our experts will help you create your personalized plan so that you can start breathing more easily. Results happen sooner than you think.
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