There are two perceptions when people ask the question: “Should I Invest my money?”.
The first is, “YES of course, the sooner the better!”
The second is, “NO the stock market is going to crash don’t do it!”
Both perceptions hold some truth, and in this article I will answer your question of whether you should (1) Keep your Money in the Bank or (2) Invest your money.
1. Keep your Money In the Bank:
Keeping your money in the bank is extremely SAFE where the value of your money will stay the same over time.
Example: You have $1,000.00 in your bank today. Even in 10 years, your money will still be worth $1,000 (plus or minus inflation).
2. Invest your money:
What is Investing?
Basically, investing is using your money to buy “shares/stocks” which represents your OWNERSHIP in a corporation/business.
For an example, let’s say Apple Corporation (Apple) has 100 shares each valued at $10. If you buy 10 Apple shares, you now you own 10% (10/100 shares) of Apple.
The reason why people invest is that they hope the corporation that they invest in, will GROW in value in the future.
Let’s say next year, Apple makes a lot of money, and now their shares are valued at $50. Your 10 shares are now worth a total of $500.00 = (10 shares * $50). You just made $400 (500-100) in one year! So when people invest, they are hoping that the company they invest in will grow in value, so that they can share in the profits.
The darkside to investing:
However, investing is not always positive and it can be risky. Corporations do not always perform well.
Instead, let’s say next year Apple does not make money, and now their shares are valued at $5. Now your 10 shares are worth a total of $50.00 (10 shares* $5) and you just lost half your money.
This up and down change of the value of stocks is called volatility which represents RISK.
The Stock Market:
The stock market is a collection of all the stocks/shares of corporations, and the stock market is volatile. As you can see, the value of the stock market is very cyclical (goes up and down). However, there is still an upwards trends. Historically, there is a 7% average growth in the stock market.
SO… SHOULD I INVEST MY MONEY?
In summary the stock market can be very volatile in the SHORT-TERM where your investments can become worth a lot today, and then worth nothing tomorrow. However, in the LONG-TERM, your investments will obtain an average annual growth rate of approximately 7% per year.
So let’s say you want to buy a car next year and you want to decide whether you should invest your savings of $20,000. If you do invest (especially in risky investments), it is possible your $20,000 will be only worth $10,000 within the year. Therefore, you won’t be able to afford your car.
However, if you want to buy a car in 10+ years, then you should invest. Even if the stock market crashes tomorrow, you still have the flexibility to wait 10 years for the market to recover. Over time, you will eventually generate an average return of 7% in the long-term.