Saturday, May 26, 2007

Why We Invest vs. Just Save

Hey guys and gals.
Today, I'd like to talk about why anyone would want his or her money to grow and why it's impossible to get rich using just your primary paycheck. But before I go into that subject, which will be my main topic, I'd like you to adopt an attitude - as silly as it may sound to you.

Instead of thinking that you never have enough money, and saying that you are "always broke", repeat to yourself that you have infinite sources of money from the universe. That you always have more than you need. That you are already wealthy because you're alive, have friends, people who love you, and the will to live on. Indeed, we all, no matter how depressing our situations may get, have a lot to be thankful for. And when we starting acting like we have abundance in our lives, and are thankful, that's when we handle our money better and make it grow.

Now, on to the main topic.

Why put your hard earned dollars at the filthy hands of the risk of loss when you can just try to save your money. Well, there's something called inflation. I'm sure that most of you have heard of it. It basically means a rise in the cost of goods or a decline in the amount of goods your money can buy, as a result of the increased money supply in the economy. Here's an example.

You ever hear your grandfolks or older people talk about how Coke used to be a quarter in the 1960s, and now it's a dollar fifty in 2007. That's inflation for you. In the 1960s, it cost Coke a certain amount less than a quarter to make Coke and then they sold Coke at a profit. As the price of the materials and labor needed to make those same Cokes rises, Coke has to sell its drink at an 'inflated' cost to make the same or greater profit.

The Federal Reserve and the Federal Open Market Committee (FMOC) - the government entity that controls the money supply, interest rate you get on home loans, credit cards, and auto loans - would like to see inflation at no more than a certain amount - usually 2 to 2.5%. 3% is pushing it.

So, ideally your paycheck would rise along with the cost of goods. That means that if milk was $1 a year ago, and now it costs $1.20 - a 20% rise in the cost of goods - your paycheck, which was $1,000 last year, is now $1,200. This is called 'keeping up with inflation'. Unfortunately, over the past few years, 'real wages' - that is, wages adjusted after inflation - have been falling.

But even if wages were just keeping up with inflation, you wouldn't just want to have the same inflation-adjusted paycheck your whole life. You want more money for your labor, experiences, and cultivated talents. Well, if you invest your money in the stock market, it's possible to beat inflation, by 7,8, or even 9 percentage points. Here at Gen Y Financial Freedom, we strive to beat inflation by 12%. And if inflation averages 3% a year in general, that means that our annual gains on our money is 15%.

How much interest does the best savings account pay? Somewhere a little above 5%. If inflation averages 3%, then in inflation adjusted terms, you are only making 2% gains on your money. Even less after taxes. Yes, savings accounts are taxed too!

This, my friends, is why we should and do invest. And not for the sole purpose of amassing large amounts of money that we never enjoy or do something altruistic with. It is so that we can help others in need in our families and communities, and do work that we find soulful - not just work that 'pays the bills'.

Thanks for reading. And I encourage you to post with any comments or questions you have.

13 comments:

Syed said...

helo, just read your writing..well, i have a question..that is- Why do we invest or what are the psychological factors work behind investment? can you please give me enough information on the above topic...Thank you..

Jonha Ducayag Revesencio said...

Well said! I like what you said about beating the inflation instead of riding with it, and one of the ways to do that is to invest in the stock market. Oh how I wish more and more Gen Y would realize the value of investing aside from merely saving.

When you said, " You want more money for your labor, experiences, and cultivated talents." It is to be expected, as we are constantly increasing our needs and growing our network, thus, consequently - our net worth.

Ned said...

I know I'm years behind on this, and just found it, but thanks! This is very informative and helpful. I'm hooked!

Elena said...

So fascinating to learn about what inflation is and how it affects Gen Y. I am a year 9 student and I'm currently completing a commerce assignment on why people should invest rather than save and your article really formed a direct link for me. Once I turn 20 I will definitely be investing!

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