Investment: What is it exactly?

Financially speaking, investing is the act of directing current purchasing power towards generating future purchasing power with no immediate benefit. Investment is therefore the complete opposite of spending where current purchasing power is exchanged for some commodity that gives some immediate benefit, but will not generate any financial returns in the future. And yes, as outlined on a previous page, the world as a whole gets richer through investment, but gains nothing from spending. 

Money is not the only thing that you can invest though. Time is another very important commodity for investment. For example, time spent on learning a new marketable skill qualifies as an investment because it can lead to great future returns. Watching TV, on the other hand, is a true way of spending time – your time simply ticks by with no long term benefit. In financial terms, using your time to learn a new skill would be equivalent to using your money to buy stock in a good company, while using you time to do some random channel surfing would be equivalent to using your money to buy your 57th pair of shoes.

Note that I am definitely not saying that all forms of spending are bad and we should all be exclusively investing all the time. Spending is good and necessary for maintaining a happy and healthy life. The problem is just that the vast majority of people today invest virtually nothing (neither time nor money) and seem determined to spend every dollar and every hour they have.

In such a society where some invest and others spend, massive and ever-increasing wealth disparities are a natural and inevitable result. People complain a lot about the 1% and the 99%, and it is true that our society does include some unethical loopholes that can be exploited by the rich, but the primary reason why the rich get richer and the poor get poorer is because the rich invest while the poor spend

The exact reason for this ever widening wealth inequality is known as compound interest – the mechanism responsible for the famous exponential curve shown below (in this case for someone investing $5000 per year at 10% interest). This amazing natural phenomenon is available only to investors and will forever lie beyond the reach of spenders. And yes, due to this simple phenomenon, the difference in wealth between investors and the spenders compounds tremendously over the years despite the best efforts of our increasingly socialist governments.

This section of the One in a Billion personal finance strategy will therefore aim to get you into the investor mindset so that you can make the power of compound interest work for you and, in the process, make the world a wealthier place. 

2 thoughts on “Investment: What is it exactly?”

  1. All of what you write may well be self-evidently true. However, in acknowledging the historical fact that the hegemony of free-market economics has increased inequality in developed countries, you appear to come perilously close asserting that poor people are lazy whereas the rich are not. This is what people like Mitt Romney believe; it is the epitome of all that is wrong with meritocratic thinking. I am not a socialist – and I do not believe in taxing the rich and giving to the poor – but I think we must all be very careful to avoid appearing to suggest that poor people are just poor because they are stupid or lazy.

    1. I recall that we had some discussions along these lines right after I began blogging some three months ago. My position from that discussion remains unchanged; I don’t think that poor people in general are lazy or stupid, I just think that they don’t invest and thereby never get into the spiral of compound interest.

      However, I see now that my use of the term “social inequality” probably did not correctly convey my meaning. What I meant was “wealth inequality” (not “income inequality”) and people nowadays probably view social inequality in terms of income inequality rather than wealth inequality. I’ll update the post to better convey my meaning.

      Now that welfare states are still in tact and cheap credit is freely available, income inequality really is all that people worry about (another indication that the vast majority are spenders and not investors), but wealth inequality will rapidly take center stage as these things fall away in coming years. Today, people measure financial success by the size of their paycheck, but it will probably not be too long before the emphasis shifts to financial resilience.

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