“I’m not into investing”, is one of the most cringe-worthy things I’ve heard anyone say. In case you don’t already know; if you have a bank account, like it or not, you have already invested your money into the financial markets.
What do you think happens when you deposit your money with a bank? It never ceases to amaze me the amount of people that still believe that banks are little more than professional piggy banks — helping people to store their cash and coins in iron vaults instead of mason jars.
When you open a bank account, you’ve already effectively decided to lend your money to someone to use for investment. Banks keep a record of how much it owes you — and then proceed to take nearly all of your money to invest with in financial marketplaces.
They either lend it out to companies who need to borrow the money, or use your money buy a great variety of assets, to be re-sold at higher prices to turn a profit. That’s precisely how they are able to pay you an annual interest on the money you keep with them.
When you hand over your monthly salary to a bank, at the end of each year they return you an infinitesimally small fraction of the profits they’ve already made with your money — yes, the money you’ve willingly handed over to them to play with.
In case you’ve never realized, there is a sheer difference between the obscene profits they make and the paltry amounts which banks pay you as interest every year. That difference between what they make with your money, and what they return to you is precisely how bankers finance their lavish paychecks, and tailored suits.
Like it or not, your money is being invested anyway. The only difference is how much you get back in return for investing your money.
“At least my savings are safe with a bank”, some will say. Well, that is only half-correct. The half that is correct is explained by the fact that most countries have what is known as “deposit insurance”. This is usually a national government institution that guarantees the deposits you put with a bank — but only up to a certain amount.
That guaranteed amount varies in different countries. For instance, in Singapore where I live, that amount is capped at 75,000 SGD (approx. 54,000 USD) per savings account. Suppose you had $100,000 in a Singapore bank account, and a severe crash wipes out the bank, sending it into bankruptcy. The national government only guarantees $75,000 and you stand to lose the remaining $25,000.
Banks have had a spectacularly long and recent history of going broke. Yet most most people tend to over-estimate how safe their money is with a bank.
Now as with all half-truths, there is a half that is omitted: the money in your bank is actually shrinking in value each year. Even if your bank doesn’t go bust, most people fail to realize that growing your money is a need-to-have, and not a nice-to-have.
The reason for this is simple, but invisible to most people — inflation. You see, your money is only worth as much as the amount of things you can buy with it. This is known as “purchasing power”.
General price levels increase all the time — housing, food, medical treatment, travel, entertainment— inflation is a measure of how fast those prices rise. That means that if the value your savings aren’t growing at least as fast as the cost of things rises (i.e. inflation rate), the money you think is safe with a bank is worth less with each passing year.
Money in your bank account that isn’t growing faster than inflation isn’t just stagnating — it’s depreciating in real terms.
“But investing on my own is too risky”, some will cry. Is driving a car risky? Is flying on a plane risky? You may realize that the answer to the above questions depend on a multitude of factors — of which, the experience of the driver behind the wheel and the pilots in the cockpit, is key. An experienced pilot with thousands of hours of flight time presents a totally different level of risk to passengers than if you were to put the plane my untrained hands.
Risk can be defined as the probability of making mistakes. The level of risk in any activity is partially-related to how much relevant knowledge and experience the person performing the activity has. Just like a well-trained driver or pilot, the risk in investing is minimized with a trained investor deciding on the best way to deploy his/her capital.
As of 2018, pedestrian deaths in the US alone hit the highest rate in 28 years. That means that the probability of dying from just walking about has continued to go up every day for 28 years —yet you don’t hide in our home, fearing the risk of becoming a dead pedestrian. Instead, you continue to cross the street daily to get to where we want. Of course, you manage your exposure to risk by looking both ways before crossing.
The mere fact that something is risky — i.e. that we might get hurt — does not deter us from doing the things we have to do.
“Finance is too complicated for me to understand”, many will say. Finance appears intimidating because it tends to be jargon-laden and numbers heavy. But the truth is that everything can be translated into commonsense terms. Even the most sophisticated financial products like Collateralized Debt Obligations (CDO) can be explained in terms so simple that a high-school graduate can understand. The only problem is that most people cower away in fear when confronted with the appearance of complexity.
Also, education is necessary, but not sufficient to make a competent investor. Numerous investors I know with fund sizes as large as $400 million were self-taught. On the other hand, I know numerous professional economists and chartered accountants that couldn’t be trusted to manage even $1000.
Investing is a proven road to financial freedom — you only need to compare yourself with the bankers who invest your money to know this. But it all comes down to this: how much do you value financial freedom?
To understand financial freedom, you only need to look at the alternative: a lifetime of being held hostage to a single source of income.
Can you walk out of a toxic workplace without worrying about your income? Or leave a toxic relationship to live on your own? Can you take a holiday whenever you need to take care your mental health? Can you decide when and where to spend time with your friends, family and loved ones? Can you spend time pursuing the things that interest you without having to worry about paying the bills? If your answer to any of these questions is no — you already appreciate what the alternative to financial freedom is.
See, financial freedom isn’t about quitting a job, and doing nothing. Life without occupation is meaningless — we all need to find our place and our roles in this grand story of life. Financial freedom is about two things: 1) freedom from the fear of losing your sole source of income, and 2) freedom to do the things that you want — how, when, where and with who you want to.
Like crossing the road, nothing in life is ever free of risk. But the probability of failure can be greatly minimized with practice and education. Anyone who truly wants to take charge of their own money, can learn how to cross that road with both eyes open.
Summary:
- Like it or not, if you have a bank account you’ve already lent out your money to be invested in financial markets.
- People under-estimate the risks of putting money with banks despite their spectacular history of going bust, and the risk from simply doing nothing (inflation).
- Investing is like crossing the road. The risks of getting hurt can be minimized with training and education.
- The only difference is whether or not you want to be led by the nose, or learn how to maximize your own hard-earned money.
