Why do we invest? (tutorial #0)

Why invest?

An investment is a sacrifice from current consumption. If you are earning $3,000 a month, setting aside one third of your monthly income for investing is a huge sacrifice. You would have to cut quite a lot from your consumption to save $1,000 each month.

Why would you want to do that? Why would you sacrifice current consumption? The answer is simple. To boost your future consumption! For instance, you might be setting aside money for your pensions so that you have enough to spend when you retire. By spending less today you hope to be able to spend more in future.

Sometimes we do the opposite of investing. We borrow. A good example is buying a house or a flat with a mortgage. Imagine a newly-wed couple. The couple would need a home to live in together. If they don't own a place already, they would either rent or buy one, typically with a mortgage. The mortgage has the advantage that by making mortgage payments rather than paying rent you earn the ownership of your home. Many couples would like this and would be willing to sacrifice their future consumption (mortgage payments can last up to 30 years) in order to have a home now.

Do you see where we are driving at? Investment and borrowing are the opposite sides of the same coin. You can either increase your current consumption now (e.g. buy a house) by borrowing, which is a sacrifice of future consumption, or increase your future consumption (e.g. enjoy higher pensions after retirement) by investing, which is a sacrifice of current consumption.

In the next tutorial, we will start learning about how to measure the performance of our investments by calculating the return on investment.

Next tutorial: Net and gross return calculations

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