1) What happens to my money over time?
DISCLAIMER: I AM NOT A FINANCIAL EXPERT OR ADVISOR, ALL CONTENT POSTED ON THIS WEBSITE ARE JUST MY FORMULATED VIEWS. Putting the topic of investments aside for a second...What happens to the money in your bank account over time by default? Well, thanks to inflation, the value of your money decreases over time. The inflation rate generally rests around the ballpark of 2%-2.5% mark, so what does this mean? - Things will cost about 2% more than the year it did before - E.G. In the 1970s, if you bought a cup of Starbucks it would generally cost you about 25 cents, but in 2019 that same cup will cost you around $1.59, this is inflation in action - E.G. 2 - Let's say you hold some liquid cash of £2000 in your hands right now, you leave it in a safe and you never look at it again for the next decade... In 10 years' time that £2000 will not be worth £2000 anymore as everything will have increased by 2% annually...so the value of that £2000 will have fallen... Even putting your money in a savings account paying you 0.2%-1% interest, meaning the money you park there increases by 0.2% annually. However, you are not making 0.2%, the value of your money is still losing 1.8%. As I mentioned previously, the current inflation rate rests at 2.5% and has done so the previous years; if you are not returning 2.5% of your money pa, you are automatically taxed by inflation.
Hence why also Milton Friedman observed: "Inflation is taxation without legislation". This is the Time Value of Money.
I want to keep this simple but if you were to look at it this way using the same example...
Present Value Formula:
PV = FV x (1/1+r)t < Just to let you know the t is (1+r) to the power of t
1960.44 = 2000 x (1/1.002)10
So that same £2000 in 10 years' time adjusted for inflation of 0.2% will be worth £1960.44, meaning you would've lost £39.56, which is obviously not good.
Bear with me, I'll have to update the next posts in the next few days...
2) How do I stop my money from losing value over time?
So let's say hypothetically you have a savings account with an interest rate of 2.5%, this would've matched the rate of inflation as I discussed in my previous posts, therefore leaving your money stagnant over time. If you're reading this and you have an issue with the word: interest (riba); remain calm, investing is NOT the same as interest but we'll touch this topic later...but the point to note here is to not just stop losing money, but to actually make money as well... this will then bring you to my next post...
3) Making Mulla...Printer go brrr...
Now let's go back to that hypothetical savings account with a 10% interest rate (WHICH WILL NEVER HAPPEN). But hypothetically, this would mean we would 10% of the value of the savings account compounded over time. Let's say you put £100 in a savings account with a 10% interest rate (which will never happen lool) ...this will be the future values of that same £100 1 year - £110 2 years - £121 (10% of £110) 3 years - £133.10 10 years - £259 but £206 after adjusted with inflation. Jheeze! You think you're sick because you doubled your money right? Sorry to burst your bubble, but savings accounts like these do not exist because it's just way too high, and if inflation caught up you'd basically be paying like £100 for a loaf of bread... Especially in the current economic conditions we are in and banks consistently reducing their interest rates on savings accounts, most savings accounts in the UK offer <1% interest rate... So how do I get to this 10% savings account? This my G is where investments come into play.
4) INVESTMENTS...
Say swear you've gotten this far? Right, to kick off, investments put money in your pocket - aka. assets - this can be physical or liquid. (DISCLAIMER: Investing comes with risk, please carry out your own due diligence, all content posted on this website is my formulated views.) E.G. > Physical - Houses > Liquid - Stocks Let's say you buy a house for £200,000 (probably some cardboard box in London) to lease to tenants, there are 2 ways you make money from this: 1) Rent - £830 pcm = £10 000 pa = Paying off your house in 10 years 2) Appreciation/Inflation = The value of your house will increase in 10 years. Historically in the UK, house prices double every decade (depending on your area as well). So maybe your house is worth £300,000. This would mean you make money from rental income and capital gains. BUT the problems lie of: > Property Maintenance > Large Deposit > Mortgage > Rental Management > And another 5-10 maybe... Relax, I'm not telling you to go buy a house, this is where small steps come in, a.k.a. buying shares in a company.
5) Shares...
Remember that magical savings account I told you about? Buying a share of a company means you are buying part ownership of a company... There are 2 basic ways you could make money from this, there are also Options (Highly leveraged derivative products) but that's not really my expertise: 1) Dividends 2) Share price appreciation 1) Dividends E.G. Black Friday and Christmas sales come through and Apple has a profitable quarter due to its tech sales, as they are feeling generous they choose to pay a dividend to its shareholders, let's say Apple chooses to issues a dividend of £2m, this will then be split amongst its shareholders. 1% ownership of Apple (The company) would mean the shareholder will receive 1% of that £2m in dividends... Chill not even its CEO owns 1%, even though it's the most valuable company in the world. 2) Share price appreciation... This is the simplest way but it takes patience, sort of like houses, you just carry on buying and holding and watching it grow over time...you know? Kinda also like a proud father watching his kid grow up...anyways... Let's say you bought Apple in 2010, which at the time were trading at $9 per share (POST-2020 SPLIT FIGURE) and you bought 10: As of October 2020, Apple is trading at avg. $115 per share, so the 10 shares that you bought in 2010 would be worth $1150 today despite you only paid $90. If we were to extrapolate this data, that's an incredible 1177% Return-On-Investment (ROI)!!
6) The Dips...
RED DAYS, them days where you are probably in the process of filing for divorce and your portfolio drops 5-10% because the NASDAQ composite got put in a spliff... wait, wait, wait, you panic sold?? *Sighs* This is exactly why they left you... this level of irrationality is the causing factor towards your cognitive deficiency...Right, that was harsh, I'm only playing, but moving on...
Well, the key is the stock market is it's not the roulette table my G... That's not how it works...
The key thing to do, and this is the simplest way, is buying and holding good valuable companies that you deem to be here the next decade...
Some examples: Tesla, Facebook, Apple, Amazon, Netflix, Google
Put it this way, if you can't see the company's future don't bother... On the other note, if you deem the company is going to be around in the next decade and you own shares and it DIPS, you don't panic. The only thing to think about is: "Should I double down?"
E.G. If you bought company X at $100 a share and it dips to $70. Well if you liked it at $100, then you should love it at $70, so you should be willing to throw more...Don't bother with penny stocks, usually just pump and dumps, kinda like your first wife/husband.
Nowadays you can also fractionally invest with expensive stocks such as Amazon ($3000 per share) but say if you only have $1000, you can still fractionally buy 1/3 of a share of Amazon. But what's important to note here is if Amazon goes up 20% from $3000 to $3600, your $1000 still makes 20%, which is now worth $1200... you see where I'm going with this? So the key thing is to also carry out your own research and move from there.
Furthermore, there's a reason companies like Apple and Amazon have been around for this long...