Tuesday, June 24, 2014

How is wealth created?

As a Certified Financial Planner, I’m often asked by women how investments work, and why they should invest outside of a savings account.  Without a clear understanding of why you should invest in a company in business in an attempt to make a profit rather than putting money in a savings vehicle like a CD, it may be easier to take the path of least resistance.  Let me explain.  The bank or credit union pays you one quarter of a percent (or less) on your deposit, which is in essence a loan to the bank, and they loan money out to others at 4% to 5%. You may get a bit more on a CD, but that, my friend is capitalism.  A savings deposit pays one quarter of a percent (.25%) to the loaner (you); and 4.75% to the owner (the bank). In order to accumulate meaningful savings, it is often necessary to take on some investment risk. So that leads to the question:
How is wealth created? 
There are four things required in order for wealth to be created.
1.         Financial capital or money.  Money is necessary to be invested in order for a company to manufacture a product or provide a service for a profit.
2.         Natural resources.  Oil, gas, land and gold and other commodities are assets that can be used in creating products.
3.         Intellectual capital.  A great idea or a new way of delivering a product or service is an example of intellectual capital.  Think Apple i-Phone or the Google search engine.
4.         Skilled labor.

When all four of these things come together, wealth is created.  If we provide capital to a company through investment of our money, that entitles us to a piece of the wealth created.  Investing, in its simplest form, is saving a part of what you earn, having an investment philosophy or discipline and a roadmap, and paying attention to the cost of the investment.  If you’re not sure how to proceed, engage a Certified Financial Planner and they will help you make a plan.  Don’t wait for your husband or your father or some other man in your life to do this for you.  You are capable and qualified to do this on your own.