Most successful wealth creators know how to save – and that’s important. In order to be in a position to invest, you must first be in control of your cash flow, otherwise you have nothing to invest.
However if you want to create real wealth, you need to be more than just a good saver. You must make the transition from ‘saver’ to ‘investor’. Why? Because if all you do is save money, you are not building wealth. The returns you earn are eroded by inflation.
Investing is different to saving because it involves putting your savings to work and accepting an element of risk in exchange for growth potential. Investing is all about being active with your money now so as to build something in the future.
Many people believe that to create real wealth you need a lot of money to begin with. Not true. What you really need is the discipline to put your money to work on a regular basis. And, the sooner you start the better.
Investing works because of the principle of compound interest
Each dollar you invest has the potential to earn a return and if you reinvest that return, it earns a return and if you reinvest that return, it earns a return and if you … and so on.
This principle, known as compound interest, is why investing creates wealth. It turns your savings into earnings and those earnings into wealth.
Creating wealth doesn’t necessarily require a lot of money. It just takes discipline, consistency, time and the power of compound interest.
Risk and return are directly linked; you won’t receive an adequate return without taking on some risk, so don’t confuse risk with volatility
When talking about risk, many investors are actually talking about volatility – the usual ups and downs of investment markets. When the actual return from an investment is lower than expected, investors believe that they have lost money in a physical sense. But in fact they have only lost money ‘on paper’. It is only when they actually sell the investment at the wrong time (when returns are at their lowest) that they permanently lose money.
You will learn more about volatility and the cyclical nature of investment returns in later principles.