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.
