Mini series on basics of finance- Part 3

Why Should You Invest?

In a world where money talks the loudest, how does one realise one’s dreams? Obviously, money is the answer. But how to make money is the real challenge, and an even greater test is matching one’s income with expenses. In today’s times, everyone is concerned about making ends meet. Uncertainties like increasing prices, changing lifestyles, pink slips, health problems are some pressing concerns. Then there is also the part about saving for a rainy day.

What Is Investment?

If you are a novice at investing, terms such as stocks, bonds, bonus, dividend yield and P/E ratio may sound like Greek and Latin to you! But relax. Investment is as much a science as a fine art, and takes time to get a grip on.

At the first level, you must understand that investment is the method to gain profitable returns as interest, i.e. income appreciation in value. In the simplest of terms, it means to let your money work for you.

Consider the following:

You cannot create a duplicate of yourself to increase your working time, can you? So, what then? You have to send an extension of yourself – i.e. your money – to work for you. That way, while you are putting in hours for your employer or sleeping, reading the newspaper or socialising with friends, you will also be earning money elsewhere. Quite simply, making your money work for you maximises your earning potential whether or not you receive a raise, decide to work overtime or look for a higher-paying job.

Investment options are aplenty – stocks, bonds, mutual funds, real estate, gold, etc. No matter which option(s) you choose, the goal is always to put your money to work so that it earns you an additional income. Even though this is a simple idea, it is the most important concept that you need to understand.

Invest so that your money grows and shields you against rising inflation. This is to say that the rate of return on investments should be greater than the rate of inflation, leaving you with a decent surplus over a period of time. Whether your money is invested in stocks, bonds, mutual funds or certificates of deposit (CDs), the end result is to create wealth for long-term goals like retirement, marriage, assets, vacations, a better standard of living or to pass on the money to the next generation. It is also exciting to review your investment returns and see how they are accumulating at a faster rate than your salary.

This article was shared by Dalal Street Investment Journal to IFIM B School.

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