When you ask most people how they save, they’ll tell you that they’re putting money away for a rainy day in a savings account somewhere. Almost always, this means that they’re handing their money over to a bank free of charge. In some cases, the interest rate is so low that they wind up losing money to inflation.
Wealthy people know this game, so they don’t take part in it. Most don’t even have savings accounts. Instead, they plow all their surplus income into buying up capital – usually stocks and shares in companies.
The Advantages Of The Stock Market
There are two fundamental reasons why they do this. The first is that it shields them from inflation. Since businesses can always increase the prices they charge customers in response to rising costs, they are the ultimate inflation-proof asset. The value of stocks rises in tandem with the nominal value of expected future profits. So if the price of a firm’s products goes up, the real value of their profits will too.
The second reason has to do with making real returns. In the good old days, banks were just middlemen who took capital from those who owned it and distributed it to those who needed it. Thus, somebody who had a lot of cash sloshing around could offload the task of putting it to productive use to the bank.
That’s not how modern banking works at all. When you give your money to the bank, they lend it out, but it’s usually to people borrowing to pay for the mortgage. What’s more, they create much more credit than you give them by generating additional deposits in checking accounts.
The net result of this is low returns. The system is awash with cheap money and low-interest rates, so making a return on a savings account isn’t feasible.
Wealthy people, therefore, own productive companies. They seek out firms with good products and balance sheets and then buy their shares. Historically, they’ve made around eight percent per year, which is much more than the average savings accounts.
If you get into things like CFD trading or factor investing, you can make even more money (as long as you know what you’re doing), allowing you to generate the kind of returns that will afford you genuine financial freedom as a family.
Investing In Stocks
Investing in stocks is a little different from opening a savings account. The value of your investments will fluctuate according to the market’s movements, depending on investors’ perceptions of the firm and the broader economy.
So when you buy equities, you need to prepare yourself for the fact that they could lose a large chunk of their value – as they did during the coronavirus first wave. In return for accepting that higher risk, though, you stand a greater chance of reward. While you might lose money in any given year, you stand to gain, on average, over many years. If you can stick it out, you can provide your family with the nest egg it needs for the future.
