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June 1, 2012

Why Is Investing Important?

I remember when I started driving back in 1999 at the good old age of 16 and gas was about $1.15 in Los Angeles.  I didn’t think much of it since I never monitored gas prices prior to that.  Flash forward to 12 years later and gas is now $4.50 for the same exact product!  That is a 3.9x increase in price over 12 years.  Back in 2005, I bought a dozen eggs at Trader Joe’s for $0.79 and now I pay $1.79 for the same eggs which is 2.25x more in 7 years.  Everyone who pays for anything has noticed these trends i’m sure.

Not everything goes up in price.  There maybe some technological advances that bring prices down.  I know the price of hosting a website has gone down significantly over the past few years and so has big screen TVs, but most day to day living expenses generally go up.  My utilities, food, rent, gas, and bridge tolls all have been generally climbing up in price.  All price changes are based on supply and demand, but the reason most things are trending up is Inflation.

Historically, inflation rates is about 3.37% and from the chart for the last decade it looks to be about 3%.  Let’s just use 3% for our example.  As you know, $100 back in the day had a lot more buying power than $100 today, even though at the core it is still $100.

Let’s say you put away $100 under your mattress back in 2002.  Since 2002 is our starting point, let’s say that $100 has a $100 worth of buying power.  In one year, due to inflation, it will have $97 ($100 * (100% – 3%)) worth of buying power.  The next year it will have $94.09 worth of buying power.  By 2012 that $100 has the buying power of $74.41.  On the flip side, if you had invested that $100 earning a modest 5% rather than keep it under your mattress it would have increased to $162.89.  This is why investing is so crucial!

So my whole thing is, if you are not beating the inflation rate, then you are LOSING money!  So let’s get your started on the path to financial intelligence.  Read up on my other posts on money saving tips and investment ideas.  The goal of investing is to make money from your money, but investing is NOT always safe.  Diversifying your investment portfolio is something everyone needs to do.

How does a casino make it’s money?  When I play blackjack at a casino I don’t ALWAYS lose.  The casino will probably win money from me like 6 out of 10 times.  The casino understands they don’t need to earn money on every player, but when diversified among 100s of players, they know they will profit.  This is how we as investors should approach investing.  Don’t just invest in one thing or a few things.  The more places you invest, the more “safer” it is to profit and the amount you invest will generate more profit.

Another question you may have is, where does this inflation come from in the first place?  That is for another article which I will link to in a future post.



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