The Basics of Investment
What is investment? Why do people invest? The simple answer seems to be to earn money. But investment is more than just earning money. It is more about protecting your financial future. A person lives off his financial resources he possesses by consuming them. Consumption is the major part for maintaining the living standard of the person. Consumption at present is done by utilizing present financial resources whereas consumption in future is managed with future resources available at that period of time. An economic man always wants to upgrade his living standard or at least maintain the same standard throughout his life. To do so, he has to grow the financial resources to such extent that they will be able to fulfill the future needs of the person.
Investment is the sacrifice of present consumption in order to secure future consumption. When a person does not spend all his financial resources and saves a part of it, he is indeed trying to secure his consumption needs of his future. So, saving is the integral part of Investment. Investment for the future is not possible without savings in the present. Saving is the seed which is to be germinated wisely in order to grow it into a big fruit bearing tree which will fulfill the person’s future consumption needs. So, after the savings is accumulated, it is essential to invest it wisely in order to secure your financial future.
Why savings only is not enough?
Saving, though important, may not be sufficient to provide adequate financial resources to consume in the future. This is mainly due to decrease in purchasing power of money over time. One dollar today would be worth more than one dollar in 30 years time. The major villain for decrease in purchasing power of money is the inflation. With time the prices of goods and services increase making them more expensive to consume. This decreases the value of money. Same amount of money won’t buy you the same goods or services in the future. Thus you need to have more financial resources in the future than you have today in order to maintain same level of consumption. So, you need to increase the amount of your savings by investing it at higher returns if you want to improve or at least maintain today’s living standard in the future.
Will your investment secure your future?
It depends. If you are able to generate annual returns (from your investments) greater than the rate of inflation then your purchasing power will increase over time. You will be able to improve your living standard. If you generate returns equal to rate of inflation then you will able to maintain your current purchasing power and living standard. However, if your return from investment is lower than rate of inflation then you will be poorer with time.There will be erosion in your purchasing power and living standard.
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