Why Must One Invest?
The present generation drives a mortgaged car over a bond-financed higher on a credit card paid fuel.
The desires keep on growing with the growing salary, and hence you will always end up waiting for the pay cheque. Learning to play the game of money is an important step to financial freedom.
First of all, we need to learn how money works.
An asset creates income, while a liability creates expense.
When you buy your residential property from home loans, however attractive it may be, always remember it is a liability as it is going to attract expenses like interest, maintenance, taxes, etc.
The cash flow cycle of a middle class is, moreover, to settle liabilities (interest/EMIs) from the salary. As the incomes of the middle-class increase, so do their liabilities.
This was the Cashflow patten of a middle class.
The lack of financial awareness among the middle class separates them from the wealthy. The cash flow is what truly makes a difference. The wealthy are aware of the power of money and use it to their advantage. Their cash flow is consistently favorable.
The rich would invest their money to create assets which will generate income. From the income, they generate more assets. Even if they buy a house on a mortgage, they rent it, and rentals need to be higher than the mortgage. They let money work for them, and they do not create liabilities. Check out the cashflow patten of a rich class-
Here, Parekh advises us to read the book, Rich Dad Poor Dad by Robert Kiyosaki (link) to understand the concept of how to make money work for us.
Why is stock the best form of investment?
We have two options to save money-
- Keep money in a cash or saving account in your working years to save for retirement
- Take some risk and invest money in assets that have a reasonable chance of increasing value
The first option is insensible as inflation erodes the purchasing power. For the second option, the best way to beat inflation is investment in stocks. Stocks reward either through dividends or through share price appreciation. Parekh advises that for someone who doesn’t want to touch the money for 5 years, stocks are the best option. The key is to understand the difference between investment and speculation.