Why Would I Risk My Cash By Investing?
Inflation, Compounding, and Currency Risks Explained
I also made a visual form of this blog, watch the YouTube video here. My first YouTube video ever!
I’m a qualified accountant with an MBA, and no class or textbook prepared me to deal with my personal finances. I spent 5 years learning about finance, tax, investments, and accounting - and it still took me 10 years to take control of my finances. Nothing makes me happier than empowering others to also take control of their finances and build wealth, so I have recently launched a Youtube channel to spread the word even further.
During my career, I have worked on multi-million dollar investments and have seen very wealthy, very smart people make bad investment decisions, usually driven by greed and short-term thinking but also because they were sold investment products that are not transparent and that don’t perform as promised. I hope to show you, that you can invest, regardless of your level of wealth or education, in a lower-risk, diversified way - and also show you how to avoid bad investments.
I've seen many highly qualified and very successful people who are overwhelmed and scared when it comes to their personal finances and investing. So I'm hoping to democratize that information and make it easy to understand, to simplify some of the complexity.
What is the ultimate goal?
You might not understand the need to start investing, or you’re scared, or you think you’ll start investing one day when you’re older or when you earn more.
I’d like to address two principles:
CONFIDENCE and URGENCY: I want to give you the confidence to start investing your own money and also have you realize the compounding potential of your money and that your money will never be worth as much as it is now because you have time.
LONGTERM THINKING: We are not conditioned to think long-term about money, in an age of social media - instant gratification is driving our actions. A nice outfit for an Instagram shot is more important than meeting your savings and investing goals this month.
Longterm thinking
I'm hoping to prompt you to think longer term. If only for a moment, think 20 or 30 years ahead. And how that person will look back and be grateful for the actions and financial choices that you make today. Yes, life is about balance and we work hard to earn our money. We also want to enjoy the now. There should be a balance between enjoying your money now and preparing for the future.
I have 2 sets of grandparents who, despite being good earners during their working years, could not afford to retire on their terms. I attribute this to poor financial planning and investment decisions. I hope to prevent this for you and the burden it will potentially place on your children or future children.
The goal is definitely not to get rich quickly and anyone who promotes this idea or promises this, you should be very wary of. I want you to realize that investing is not exclusively for wealthy people. The industry has transformed and made investing accessible and simple for the average person.
Mindset shift
Usually, when I am approached by people for help with their finances, I am surprised to see how well they have been able to save. But there is always a hurdle to get someone over to convince them that they should start investing and that they should feel comfortable putting some of their money in their bank account into an investment account.
They say things like, “I don't want to put my money into an investment because then it's not mine anymore” and “I prefer to have this cash because I know it's not going anywhere and I know I can get it tomorrow”.
That's a mindset shift you have to make because, yes, investing does put your money at risk but keeping cash puts you at a greater risk of losing purchasing power over time. It’s also important to mention (for your peace of mind), the investments I personally make, like investments in ETFs - are readily available and, depending on the broker you use, could be withdrawn almost instantly and be available within a few hours. Read my blog on “9 things to know about Index Tracker ETFs” if you want to learn more about ETFs.
So yes, you can liquidate your investment (if you invest in ETFs, for example) and access that money. But the idea would be that if you invest your money, it is really a long-term, more than 10-year commitment. It’s not something that you hope is going to make you rich by next year, and then you're going to withdraw it.
Why would I put my money at risk?
Then the question arises, “why would I put my money at risk in an investment when I can hold it in cash and I know it's safe?”.
There are three things:
Inflation
Compounding potential.
Soft currency
Inflation
Here are the inflation rates in different countries as of February 2024:
US 3.2%
UK 3.4%
EU 2.6 %
South Africa 5.6%
Switzerland 1.07%
Inflation is an indication of how much purchasing power you lose year on year. To explain this simply: For example, if you're in the US with 3% inflation, a basket of goods for $100 is going to cost you $103 next year, and the year after that it's going to cost you $106.
Therefore, if you just keep a $100 in cash in your bank account, you won't be able to afford the same amount of things with that money the next year or the year after. And as the years go on, that situation gets worse. Therefore, you need to invest your money so that it, at a minimum, keeps up with inflation and you don’t lose purchasing power.
Compounding potential
The second thing is the compounding potential of money. The compounding potential is dependent on two things. The return you earn on the money and the time that you hold the investment for. The timeline that you hold the investment for is never going to be as long as it is if you invest today. You have the most time in your favor now.
Time is the most underrated contributor to wealth creation, read my blog “Understanding Time value of money” on this topic.
Soft currency
If you hold soft currency like South African Rand or Indian Rupee, these currencies deteriorate against the US dollar, which is a global reference currency, in the long term. Therefore, it would be smart to ensure the money you earn in whatever currency keeps its value in comparison to a hard currency such as the US dollar, Euro or Swiss Franc.
Is it really that easy?
No investment can guarantee that it will only go up and you will definitely experience some volatility during your investment journey. But, the price for playing is dealing with volatility. And this is a cheaper price to pay than the price of losing purchasing power on your cash.
So, despite ups and downs in the stock market, you should still rather invest for the long term than sit with cash on the sidelines, and it is possible to do this in a lower-risk, diversified way.
Read my blog “Investing 101: Getting Started” if you want to get started.