© 2015 Shmoop University, Inc. All rights reserved.
Financial Literacy

Financial Literacy

Home Finance Investing Introduction

Introduction

There are three basic ways to make money:

(1) Get free money by winning big the lottery or having long-lost Uncle Henry leave you his huge estate.

 
It's a sure thing, right?

(2) Earn the money yourself.

(3) Invest money and watch it grow.

Winning big or inheriting millions is great, but it's pretty unrealistic for most of us. Earning money is more the American way, but even if you have a good job, there's only so far that your wages or income will take you. You can only work so long before your coffee-steeped eyes can no longer focus. And, of course, your income is limited by how much your boss is willing to pay.

Investments are exciting because they take money you have and make it…more. While you're sleeping, taking a calc quiz, or watching TV, your money is hard at work.

Here are a few things you can invest in:

To invest money successfully, you generally need three things:

  • Time (and patience)
  • Some money to start
  • Enough investment know-how to avoid major mistakes and to deal with the risks of investing

Here's where things get exciting: it's what we like to call the power of compound interest.

Remember back when you were three and your dad would give you piggyback rides? Your height and his height allowed you to see much farther than you usually could.

Investment is a little like that.

You might start out with $1,000. Say you invest it and earn $50 in dividends. You've made 5% in gains, and now have $1050. If you reinvest that $1050 back into the stock market and earn 5% again, you'll get another $52.50. Now you have $1102.50. Might seem like a small increase, but over years and years, that money will compound, growing faster and faster.

And trust us—it adds up.

Why Should I Care?

Since you have no time and barely enough cash to pay for extra guacamole with your surprise burrito in the school cafeteria, why should you care about investing? Isn't it for old guys in suits?

Not anymore.

While you're pouring your extra cash into your gas tank or dinners at Chipotle, there are teenagers investing in stocks and securities, and taking care of business. A lot of them can't even drive yet, but by the time they finish school, they may not need that job to live the good life.

Maybe you don't want to be thinking about currencies, securities, and what the tech market's up to when you've got the SAT or your dormmate's gross eating habits to worry about, but ignoring investments is a chump move.

The Closest Thing to Magic You Might Find in Finance

Spoiler alert: there's no gold at the end of the rainbow.

If you're going to make it, you're going to have to make it on your own.

When it comes to money, you could be working (really hard) for your money or you could be putting your money to work for you. We prefer Door #2: having your money work for you (by investing) is one of the best ways to ensure you won't be forever eating leftover cheapie pizza.

Not that there's anything wrong with that.

Sure, you can work on your career to climb that corporate ladder. No matter how hard you work, though, you're going to hit a limit. It may be the limit of how much your boss is willing to pay you, how far you can go in your chosen job, or just that glass ceiling everyone keeps talking about. After that, you'll be struggling to earn more.

With investments, there is no limit—and you don't have to work harder to earn more. In fact, with investments, you don't have to work much at all, beyond finding out about how investments work so you can choose good ones.

Let's say that you have your dream job slapping your boss upside the head when he becomes distracted (you live in Silicon Valley, where these types of jobs exist). You apply the perfect pressure vs. force and keep your hands soft with lots of hand lotion. Your boss is so impressed that you get a $20,000 bonus.

Since you live in California, you pay about $10,000 in taxes, which leaves you with a check for $10,000. You can do a lot with that. You can use it to pay for fun stuff like fuzzy pillows for your condo or to head over to Vegas to party it up on the Strip.

Instead, you decide to invest in stocks. Good choice—we hear Vegas gets really warm this time of year. You find a stock you like and buy it. The stock goes up in value 10% each year for years. After the first year, you have $11,000, so you make 10% on $11,000 instead of on $10,000. And so on.

There may be no such thing as a free lunch, but this comes pretty close. What if you could invest even more? What if you could save up $100,000? With a 10% gain, you'd be raking in $10G a year or about $200 a week doing nothing. If you kept socking away your money you might eventually be able to quit your job and live off of nothing but your investments. You'd never have to deal with lazy co-workers or yelling customers, and you'd have all the time you wanted to spend your cash.

Have we Shmooped your attention? We thought so.

People who Shmooped this also Shmooped...

Advertisement
Advertisement
Advertisement