“Money doesn’t grow on trees, but money does grow on money”, was a phrase my grandfather always used to say. At that time I was very young, so I didn’t quite get what he meant by this, but now that I’m older I couldn’t agree more. Today, the majority of us works around the clock, seven days a week, under enormous pressure and stress to earn money, realizing the importance of investing for retirement in your 20s. But, what if I told you that instead of working for your money you could make the same amount of money working for yourself! Just imagine that, being your own boss, enjoying stress-free life, while your money takes care of the rest. Well my friend, you’re in luck because such a thing has already been ’invented’ and it’s called investing.
What is investing?
When I say that your money works for you, I don’t mean that it literally works for you as in mowing your lawn or anything like that (if only). What I mean by investing, simply put, is committing money (capital) into something today and expecting a larger return of money or capital sometime in the future. For example, imagine buying a hot-dog, you ate it and you satiated your hunger but, in truth, it was a poor investment overall because you get no money out of it in return. Now, if you bought shares in a successful hot-dog company that would be a totally different story. See, the most common ways of investing money are either stocks, bonds, mutual funds or real estate, and the ‘secret’ behind growing this invested money exponentially is a thing called: a compound interest.
Compound interest is a phenemonon where both the initial capital of an investment and the interest gained on that capital, earn interest over time. This means that each time money is earned through an investment, it’s going to stack with the initial capital and make it grow. For example, imagine investing $2000 in a company, and they earn 20% that year; your total earnings would be $2400. However, next year if that same company earns yet another 20%, your total balance for that year won’t be just $2800 but $2880, because the 20% is applied to the total balance of last year which is $400 more than the initial capital invested, so you earn the extra $80. Thus, each time money is compounded, whether it is done yearly, monthly or daily, your total balance increases exponentially, earning you extra profit.
As seen in the example above, buying common stocks allows the buyer to participate in the profit and losses of a company generated through a certain time period. It’s a high-risk, high-reward kind of a system, where you can earn a huge profit depending on the success of your stocks. Moreover, stockholders might also be entitled to dividends if the company declares them. Despite this, stockholders don’t actually own the assets of the company, but in the case of liquidation, they have a claim on those assets.
With bonds, the buyer (investor) is loaning money to the bond issuer in exchange for periodic interest income. When the bond finally matures, the initial sum is returned to the investor. You can buy corporate bonds, government bonds, tax-free municipal bonds, and so on. A typical bond ranges from $500 to $1000 and is fully taxable (apart from the municipal bond). Similarly to stocks, bonds’ value can rise and fall over time (usually depending on the fluctuation of the interest rates) and they are both purchasable on the secondary market.
A mutual fund is a collection of money gathered by a group of investors with the aim of investing it in stocks, bonds, and other assets. This mutual fund is then actively managed by a professional investment manager with accordance to the mutual funds’ portfolio in order to achieve the most lucrative results. There are different kinds of mutual funds depending on the type of securities the fund is investing in. They can be active funds, passive index funds, fixed income (bonds), and so on. In a way, mutual funds work like companies, in which many people invest their money and then expect a return on investment, just like with stocks.
A textbook example of investment and one of the oldest and most straightforward ways of investing money. It basically comes down to buying property and then letting others use it in exchange for rent. The capital gained by rent can then be used to renovate or improve other properties that you own, so you can sell them for a higher profit. Next, you can acquire yet more real estate and rinse and repeat. For many, this has been the easiest and fastest way to accumulate initial capital and wealth, as it is not as slow and as risky as stock exchange.
All in all, there are different types of investments which suit different types of investors. Real estate is usually the type of investment beginner investors start out with before moving on to mutual funds, stocks and the newest trend around – investing in ICO. Whatever the case may be, one thing is for sure – money really does grow on money.