When you think about money, what comes in your mind? I bet the first thing that comes to mind is something to pay the bills with. But money has other functions too.
First of all, you must think differently about money. Just think about it as a unit of something. That unit could be euros, dollars yuan and so on. The well most know functions of money are:
1. Unit of transactions (buying goods and services)
2. Unit of comparison (Like comparison different prices or investments
3. Unit of saving (stored as value)
These things are universally known and you can find a lot of information about it on the internet.
When it comes to money, it’s just like shoes. What I mean with that is that money also has a price. That price is stated as interest. When you borrow money from the bank; for example, 10.000 euros at an interest rate of 7% per year, you will pay 10.000 x 7% = 700 euros interest for it. If you pay everything back in one year. You would have paid the bank 10.700 euros in total.
The other way around works too. If you save your money at the bank, you will get some interest for your money. Usually tho, its a lot less than the interest you pay for with a loan. As of writing this, banks in The Netherlands give interest-rates from 0.10% to 0.45%. Note, this is less than 1% interest. It used to be as high as 5%.
So what are the alternatives? Investing money so you can get more money out of your money! The most basic kind of investing are investments that increase the value of your assets or assets that will pay you dividends. Please be aware that investing money has a risk and you could lose your money.
Increasing the value of your assets:
Let’s start with the first one. Increasing the value of the asset. An asset is something that is generating income for you. Like stocks or real estate. When you buy a stock, you would hope that the value of that stock will increase. For example:
You buy a stock of company X for 100 euros. Six months later and the stock is now worth 110 euros. The value of the asset increased with 10%. Pretty easy right?
When we talk about dividends, it means that the asset is paying you something. For example:
You buy a stock of company Y for 100 euros. The company pays out dividends for every stock you hold quarterly. That could be a small percentage of the stock or just a fixed price per stock like 50 euro cents. If you had one stock and we waited six months, the company had paid you out 1 euro of dividends.
The difference between these two examples is that in the first example, your asset will increase in value. If you want to cash the increase in value, you would have to sell your asset.
In the second one, your cash flow will increase. The dividends from the company Y are paid out in cash, meaning that you can use that money for something else, or just reinvest.
These two things are the very basic and fundamental things you should know about investing in the financial markets. You as a person must know that money isn’t only used to pay the bills for. Money is a tool, in which you can decide how you wanna allocate the unit.
My message is: stop using money for stupid transactions (goods like Starbucks?) and start saving money so you can buy assets.
In my next blog, I will show you what my current investments are and why that I did them.
Like my new kitten? His name is Bernhard <3