Don’t let the image above scare you. In fact, images just like these were created to scare you. Maybe you are saying to yourself, “What the hell is this guy looking at? What does the chart mean? I don’t understand any of this. Is this what I have to do to invest my money? Forget it.” It’s images like these that can deter you and prevent you from learning, and ultimately, experiencing financial freedom.
What is investing?
Excellent question. It’s a question that everyone asks, but it hard to describe. For our purposes, let’s make an simple (and slightly unrealistic) example to explain it.
Let’s say your friend was opening a pizza shop, and it costs them $20,000 to open the shop. However, they don’t have the full $20,000 to open the shop, they only have $15,000. Your friend asks you for the other $5,000, while also offering a 25% ownership in the pizza company, since you covered the 25% of the opening costs. Great! You now own a “stake” in successful pizza shop, and you have invested $5000 of your own money for 25% ownership in the pizza shop.
Now, fast forward a few years. The pizza shop has done so well that your friend has opened 5 more stores and the pizza company, which was originally worth $20,000 when it first opened, is now worth 1 million dollars. Keep in mind, you still own 25% of the company. But wait! Your 25% stake in your company is now worth 25% of the 1 million dollars, not the original $20,000. Your original $5000 dollar investment is now equal to $250,000!
That sounds pretty cool, but why should I invest?
That example is nothing short of amazing (and albeit somewhat unrealistic), but for our purposes it explains what investing is and how it works. As an investor, you buy a “share” of the company in order to own a stake in the growth and profits. In our example, you invested $15,000 of your own money, and your friend invested $5,000 of theirs. You expect the company will grow, increase in value, and increase in profits. As a part owner, or “shareholder,” of that company, you get your proportional ownership reward for an increase in company value and profits.
But do you know what the best part of the example is? Your $5,000 dollar investment is now valued at $250,000 dollars, and you did nothing at all to make that money. Isn’t that enough reason to invest?
Hmmm… sounds kinda scheme-y?
You’re smart to think so. That kind of profit is hard to come by, even for some of the best investors. It is also entirely possible the pizza shop could have failed, meaning you lose some or even all of your original $5,000. Remember, this was an example to illustrate what investing is and how it works, not how much money you will make.
Now that you have a better idea of what investing is, it’s time to think and take a step back. What is the relationship you have with your money? Do you work for your money, or does your money work for you? Do you go to your job every day, take home your paycheck, and spend whatever is left of it? Or do you invest it? Does your money work for you? Financial freedom will not come to those who work for their money. It comes to those who put their money to work, for them. This is the mindset that separates the wealthy from the poor. Who is in charge? You? Or your money?