Everyone knows what investing is, but what are people actually doing when they invest? Fortunately, the world of investing is actually very straightforward and easy to grasp. You just have to start with the fundamentals.
Investing is a way to increase your wealth and achieve your financial goals in life. Warren Buffett suggests investing is "…the process of laying out money now to receive more money in the future." The purpose of investing is to get your money to work harder and produce more returns than what you can expect through savings alone.
Why do people invest?
People invest their money to achieve one or another goal in life; some investors are looking to provide for their retirement, others to buy a house, or to build up a fund for their children's education.
No investor is the same, and everyone's goals are different, but all investors share one characteristic: They want to grow their money over time.
How is investing different than saving?
Investing and saving are both essential to your financial wellbeing, but they serve two very different purposes.
Investing seeks to generate profits by buying and selling assets, while saving seeks to protect the money you already have.
Savings (usually saved in a current or savings account) is the money that's there when you need it most. Over the past few decades, life expectancy rates across the world have risen at a very fast rate and the responsibility for an individual's financial well-being increasingly lies with the individual himself, and no longer the state to provide him with financial security.
However, here's the thing: Money in a current or savings account will not earn you much interest, and therefore your money is unlikely to grow much, if at all. In short, building your savings is critical to making sure you have cash ready, even though it's not necessarily great for growing your money.
This is why investing is an essential component to growing your portfolio to achieve the financial goals you have, and why savings alone will not get you to where you want to be.
But with investing comes risk, and how to manage risk effectively to generate the returns you want is the subject of the next chapter.