Before investing your money, the first thing you should do is asking yourself “why” should invest your money. This is such an important question. Knowing “how” or “what” isn’t as important as knowing “why” you should do something.
If you look at investing theory, there are mainly 3 objectives of investing. Of course, these vary from one source to another but below 3 covers most of them by and large.
3 objectives of investing
1. Income objective – This is simple. You’re investing to make a periodic income. From each of your investments, you’re expecting a periodic return. For example, ou buy a building and rent it expecting a monthly rental income. Or you invest your money in a fixed deposit and expect an interest income each year.
2. Capital preservation objective – Did you know that every day the value of your money is decreasing? Yes and this happens because of inflation. If you have no idea what inflation is, don’t worry. It’s a very simple concept.
In any economy, the prices of products and services increase over time (the reason is supply and demand but we don’t have to get into this now).
Example – You buy a basket of groceries today for Rs.1000. Do you think you can buy the same basket next year for Rs.1000? Probably not. Why? Because there’s a good chance that the prices of those groceries would’ve increased within the next year. So you might need more than Rs.1000 to buy the same basket. This is what’s known as inflation.
Because of inflation, the value of your money decreases over time (average inflation in Sri Lanka is about 5%). If all you do is hide your money in a safe at home, every year the value of that money (capital) is going down by 5%. So to preserve the value (capital) you need to at least find an investment that offers a return of 5% each year. Something similar to the inflation rate in the country.
By doing this, you will at least preserve the value of your money. You’re not earning anything extra but you’re not losing any money because of the inflation.
3. Capital appreciation objective – Here your objective is to preserve the value of your investment and to earn more than that.You expect to earn more than the inflation rate in the country. This is where most investors should be. You’re actively working on growing your capital (the money that you invested.)
OK. So those are the 3 objectives according to investment theory. But there’s one more objective and I (and almost everyone) calls it the ultimate purpose of investing. It’s like the “One ring to rule them all.”
The ultimate purpose of investing – Financial freedom
I’m sure you have heard this term a million times but let me repeat it. The ultimate purpose of investing is financial freedom.
To unpack this idea, first, we need to define what financial freedom is.
Financial freedom is not having to worry about your money. You have enough money generating each month even while you sleep so that you don’t have to worry about money for the rest of your life. Once you have financial freedom, you don’t have to be at a certain place at a certain time doing something that you don’t like. You will be free to do whatever you want to do. Your job or work will not be tied up to the amount you earn. That’s financial freedom.
This doesn’t mean that you have to be a billionaire. Financial freedom is having the freedom to do whatever you want without having to sacrifice your time to someone else.
Think for a minute.
Unless you’re born rich, all of us are trading our time to make money. That’s one of the worst trade-offs there is. Even if you’re a CEO and make a million rupees each month, you’re still trading your time for money. The moment you stop working, you will not have any money. That’s not freedom.
You need to find a way to make money while you sleep. That’s the ultimate objective of investing.
One more thing before I forget. If you haven’t inherited a large sum of money from your parents, investing is the only way to getting truly rich.
Now that you know the ultimate purpose of investing, what’s next? Next is learning “how” to invest and “what” assets to invest your money in.
If you want to start investing in Sri Lanka, we have practical workshop for you. It’s called Investing Essentials. To learn more and join the next workshop, click here.
What’s the best thing you learned from this post? Add a comment below and let us know.