Why everyone need to learn investment?

Written by Siamkia

Monday, 11 February 2008

No one can admit that money is playing very important role in every human life.Rich people have luxurious life style because they have a lot of money while poor people have miserable life because what they earn is not enough for normal life expense. Money is not everything but money is definitely essential to cover your living expense. Some people will work for several part time jobs to earn more money. Some people might choose to sell their asset to make money.Some people might borrow money from other people and some people will make money thru investment.

Investment is a method to make money thru investing your money in some asset that you think can make money for you.Some people like to buy land and house and sell it when the price rise.We called it property investment.Some people like to buy stock thru share market and this is called stock investment. Beside this two, there are various type of investment like unit trust investment, REIT(Real Estate Invesment Trust) investment, Future investment or even Currency investment.No matter what type of investment those people did, the ultimate purpose is to earn money from investment.

Two main reasons for investment

Normally, there are two main reason for people to make investment.As stated above, the first main reason is making money so that they can have a better life.The second reason is to prevent deflation of your money.Every year, all the money in this world is deflated without your awareness. Every country will have the inflation rate for their own country.Inflation rate shows the rate of increment of all the goods sold in the market.

Let's me state an example here.10 year ago,you can use $3 to buy a set of fast food.10 year later, now, you need to use $6 to buy a set of fast food.Hence, everyone will feel that things are getting more and more expensive.This is effect of inflation rate.

Let's me give you another example of how you money will be deflated.Now, you have $10,000 in your hand.Let's see the following graph and calculate the value of your money after 10 year if the inflation rate per year is 4%.

Amount	Value of your Amount	Deflated Amount
Now	10,000	10,000 x 1.00 = 10,000	0
1 Year later	10,000	10,000 x 0.96 = 9,600	-400
2 Year later	10,000	9,600 x 0.96 = 9,216	-384
3 Year later	10,000	9,216 x 0.96 = 8,847	-369
4 Year later	10,000	8,847 x 0.96 = 8,493	-354
5 Year later	10,000	8,493 x 0.96 = 8,153	-340
6 Year later	10,000	8,153 x 0.96 = 7,826	-327
7 Year later	10,000	7,826 x 0.96 = 7,512	-314
8 Year later	10,000	7,512 x 0.96 = 7,211	-301
9 Year later	10,000	7,211 x 0.96 = 6,922	-289
10 Year later	10,000	6,922 x 0.96 = 6,645	-277
Total Deflated Amount			-3,355

From the above table, you can notice that how serious an inflation rate will impact your value of your money. In 10 year time, you can see that your $10,000 will deflated become $6,922 that you have in today.In 10 year time, your $10,000 will be able to reduce more than 30% if you didn't do anything and put your money in a saving account which will only able to get less than 1% of interest per year. Can you imagine what is the value of your $10,000 after 20 year or 30 year later?

Let's see another examples that show you the effect of investment.This examples assume there is still 4% of inflation rate and 5% of investment return every year.

Amount	Value of your Amount	Deflated Amount	Investment Return	Balance
Now	10,000	10,000 x 1.00 = 10,000	0	10,000 x 0.00 = 0	0
1 Year later	10,000	10,000 x 0.96 = 9,600	-400	10,000 x 0.05 = 500	10,000 - 400 + 500 = 10,100
2 Year later	10,000	10,100 x 0.96 = 9,696	-404	10,100 x 0.05 = 505	10,100 - 404 + 505 = 10,201
3 Year later	10,000	10,201 x 0.96 = 9,793	-407	10,201 x 0.05 = 510	10,201 - 407 + 510 = 10,304
4 Year later	10,000	10,304 x 0.96 = 9,891	-412	10,304 x 0.05 = 515	10,304 - 412 + 515 = 10,407
5 Year later	10,000	10,407 x 0.96 = 9,990	-416	10,407 x 0.05 = 520	10,407 - 416 + 520 = 10,511
6 Year later	10,000	10,511 x 0.96 = 10,090	-420	10,511 x 0.05 = 525	10,511 - 420 + 525 = 10,616
7 Year later	10,000	10,616 x 0.96 = 10,191	-425	10,616 x 0.05 = 530	10,616 - 425 + 530 = 10,721
8 Year later	10,000	10,721 x 0.96 = 10,292	-429	10,721 x 0.05 = 536	10,721 - 429 + 536 = 10,828
9 Year later	10,000	10,828 x 0.96 = 10,394	-434	10,828 x 0.05 = 541	10,828 - 434 + 541 = 10,935
10 Year later	10,000	10,935 x 0.96 = 10,497	-438	10,935 x 0.05 = 546	10,935 - 438 + 546 = 11,043
Total Increased Amount					1,043

From the table above, it already shows the main two reason for investment.First, by getting investment return that is higher than inflation rate, you will be able to remain the value of your money as $10,000 after 10 year later.Besides, with higher investment return compared with inflation rate, you are able to earn $1,043 or 10% of your total investment after 10 years.

To prevent deflation of your money and make more money, start to learn investment skill from today onwards.

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