Investment 101: Why Invest?

This is the first [of an unknown number] of posts on a series on financial investing. I write this in order to brush up on what I learned from studying investment strategies, as well as to promote the practice with those who read it. I do not claim to be an expert, and I welcome any comments/suggestions to improve this series.

What is Financial Freedom?

Financial Freedom

incomemaestro.com

Financial freedom is the ability of an individual to do anything that they want in life, without the constraints tied with that issue called “lacking money”.

So where does this go? It would extend to your lifetime and to the generations to come. A responsible move you make right now will carry on to your children, and your grandchildren, and those who come after.

Financial freedom will let you live the way you want to live, and it has the side effect of ensuring that the future of those you care about will be prosperous as well. It will ensure that your child will have a home, food on the table, a good education, and a head start in life.

A disclaimer: Financial freedom is not about becoming a greedy person. It is not about seeking riches and wealth and having all those new gadgets and houses and toys. It is about freedom from the constraints imposed by money in achieving your goals in life. Those I have known who are financially free are those who do not appear rich; rather, they live simply and simply live.

Why Invest?

I have experienced my generation’s desire to “live in the moment.” “YOLO”, which stands for “You only live once” has become the battlecry of a generation who has lived in a time of peace and plenty. Yet in this time of peace and plenty, many people are ironically destitute. I have seen people spend beyond their means, only to fall into discontent in the future. It is not wrong to live in the moment; but it is wrong to fail to account for the future.

Investing is one of the many routes towards financial freedom. It is defined as:

in·vest (inˈvest)
verb
1. to expend money with the expectation of achieving a profit or material result by putting it into financial schemes, shares, or property, or by using it to develop a commercial venture.

The reasons for investing hinge into the practical and the philosophical.

The Practical Side of Investing

 

shopping-carts-inflation_zpshxolbfdi

JamesLawson.ws

To understand why investing is important, one must understand the concept of Inflation rate. Inflation, by definition, refers to “the rate at which the general level of prices for goods and services is rising and, consequently, the purchasing power of currency is falling.”

A good example would be your everyday experience at a supermarket. In the past, you could buy all your basic necessities such as bread, fruits, vegetables, meat, fish, and some luxury goods for as low as a Php 1000, all in a nice grocery cart. Now, you’ll only get a basket of some of these goods for your money these days. What the heck happened? That’s inflation. It’s a silent killer that will bite you in the future.

I remember how my grandmother would hide her money in a tin box. I remember how my father would store his money in the bank. While your money won’t get stolen, it certainly will drop in value over time.

These days (as of April 2017), a Philippine bank’s interest rate goes from 0.25% to as high as 1% per annum. As a simplification, if you have 10,000 in the bank, you’ll get Php 10,025+ to 10,100+ at the end of the year. However, the Inflation rate of the Philippines (as of April 2017) is 3.4%, meaning that the value of your money despite the interest you get from the bank will devalue by 2.4% to 3.15% over time.

While it seems small, (in the example above, having Php 10,000 devaluing over time will make your money decrease to Php 9685 to 9760, a loss of Php 240 to 315), take note that nothing is ever static in the economy, and over time, that amount of money will lose much of its value.

Enter investing. With investing, you have a chance to defeat inflation by trying to go above that 3.4% (and ever-fluctuating) inflation rate. The rate of financial growth will be defined by yourself. That’s for another article – what do I need to start investing?

The Philosophical Side of Investing

url_zps3hhnzq8e

eco.ca

Investing a choice you’ll be making everyday of your life. Investment does not only entail financial capital; it entails a conscious decision to bear sacrifices, to dream, and to look at the big picture.

I’ve been investing for almost a decade now. I’m not rich, but I can take my fiancee on a date, I can buy stuff I want to (but I hold off on – it’s hard!), and I can rest easy at night knowing that if an emergency comes, I have the means to address them.

Investing is a great challenge that I think builds character. I’ve made a lot of sacrifices (“opportunity costs”) throughout the years – not buying this gadget, not going to that event, and the like. I’ve learned how to be innovative though; I learned to go out with friends instead of playing a video game, and to read books for self-edification instead of splurging on expensive things.

Before going into any endeavor, it is important to know why you’re doing it in the first place. Investing is more than putting your money into proverbial soil to make it grow; it is to make a commitment to become financially responsible for yourself, with the goal of achieving financial freedom.

Before going into any endeavor, it is important to know why you’re doing it in the first place. Investing is more than putting your money into proverbial soil to make it grow; it is to make a commitment to become financially responsible for yourself, with the goal of achieving financial freedom. Your decisions make you. I’ll see you along the way.

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