Back in my college days, I had a friend whose parents forbade him from investing. Let's call him Jeff (not his real name).
Jeff wasn't allowed to open a stock brokerage account. His parents scolded him when they caught him reading about real estate. And starting a business? Absolutely out of the question. His parents warned him that these were all risky endeavors that would lead to financial ruin.
Their formula for financial success was simple: Get a good education, land a stable job as a lawyer, doctor, or engineer, and then diligently deposit a good portion of your salary into a bank account. Eventually, that bank account would grow large enough to support a comfortable retirement.
Jeff eventually broke free from this restrictive mindset and learned to invest independently through books and YouTube videos. He devoured personal finance books like "I Will Teach You to Be Rich" by Ramit Sethi, "The Richest Man in Babylon" by George S. Clason, and "The Millionaire Next Door" by Thomas J. Stanley.
After grasping the fundamentals of investing, Jeff secretly opened a stock brokerage account and began investing in various blue-chip stocks. He has no regrets about this decision and has profited significantly from his investments.
Jeff understands that simply saving wouldn't have secured his financial future. In fact, based on historical data, his family's "no investing allowed" policy could have cost him over 80 percent of his potential retirement nest egg.
Investing is a crucial wealth-building tool because it allows your money to work for you. But what does that mean, exactly? Think of it this way: We can divide our income sources into two categories: "human resources" and "assets."
Human resources cover anything that requires your time and effort, such as your skills, connections, and industry experience. We typically utilize these resources in jobs in exchange for a salary. Essentially, Jeff's parents believed that the only safe way to earn money was by utilizing human resources.
The second category, assets, includes cash, real estate, and any other possessions. These can be deployed for financial gain through investment. For example, we can generate rental income from real estate and invest our cash in stocks and bonds for a return.
When we rely solely on our human resources to generate income, we neglect a whole category of resources that could be working for us—our assets. Instead of allowing our assets to grow and generate income, we let them sit idle, doing nothing to further our financial goals.
The opportunity cost of allowing our assets to remain unproductive can be substantial. For instance, consider someone who consistently saves P50,000 annually for 40 years—roughly the length of a typical career.
If they simply deposit this money into a low-interest bank account, they will accumulate P2 million in savings after 40 years. However, if they invest this money in a diversified stock market index, which historically returns around eight percent per year, they could end up with over P13.9 million. That's an almost 600 percent increase in retirement funds simply by choosing to invest their assets.
When we invest, we leverage all our resources to build wealth. We don't have to rely solely on our own labor to secure our financial future. We can put our assets to work as well.
While investing involves risks, the potential rewards—when done prudently—are too significant to ignore. Don't let your cash languish in a bank account. Learn how to invest wisely. Make your money work for you, and your future self will be grateful.
Keith Lim writes about personal finance and making money through the stock market. He blogs at keithblim.com.