Your money won’t grow [fast or slow] unless it’s put at risk.
It’s a profound statement but think about it this way. If there were a way to build serious wealth without putting your money at any risk, everybody would be doing it. It would be such a no-brainer that everyone would be rich.
You. Your neighbor. Your friends. Rich, everybody!
But that probably doesn’t match your reality, does it? Yeah, mine, either.
Stock-piling your hard-earned money in a bank is a one-way street to poverty. Why? The power of inflation, over time, meticulously eats away at the spending power of your money. Most banks don’t offer interest that matches the rate of inflation.
Ultimately, this means that you’re losing money after each year.
According to Statista, inflation is projected to eat between 2% and 3% of your money every year through 2022. This means $1,000,000 in a traditional bank loses $20,000 to $30,000 in spending power annually.
Not good!
Stashing your money in a bank account might provide very little risk, but your money won’t build like it would if invested.
Building wealth generally requires risk. These risks include starting businesses and investing in real estate or the stock market. While there is a potential to lose money, there is also a potential to gain considerable wealth.
Short of winning the lottery or getting a large inheritance, smart investments get people rich.
I am a huge fan of maxing out your retirement contributions at work. Your 401k will lower your taxable income, and Roth IRAs will enable tax-free withdrawals when you no longer work.
Paying yourself first and making this automatic sweetens the deal, big time.
We use Ally to hold multiple years of living expenses and Vanguard for most of our long-term and retirement investments.
When taking risks, remember:
- Calculated risks are smart risks; this means throwing all your money at the next get-rich-quick scheme might not end well for you…that’s not a calculated or a smart risk; too many people have lost a ton of cash this way
- Calculated risks mean there’s a good chance of success; historically, the stock market provides investors with much more wealth than they started with
- Real estate investing, just like the stock market, may not automatically get you rich; markets do ebb and flow, and you might lose money
- In general, the longer you give your money to grow, the less risk you shoulder (i.e., 20-year investments are less risky than 6-month investments)
Naturally, there are exceptions to every rule. Some people do get rich quickly, and likewise, others do lose money in the stock market or real estate. However, history has shown that money devoted to smart, calculated risk stands the best chance of growing over time.
Next week, we will chat about the difference between being rich and acting rich. They are two very different things with the potential to make or break your financial picture.
