Investing is good.
Well, yes, but why is investing good?
Uh, because you make money?
Yes, that’s true, and how do you make money as an investor?
As an investor, you invest and this investing makes investment money. It’s common knowledge.
I’ve asked a lot of people over the years how an investment can make money and few can quickly tell me.
As an investor, you can make money in two different ways.
Imagine you buy a house that you to rent to a nice family, maybe a young aspiring artist, or maybe Walter White. Whatever, it doesn’t matter who you rent the house to. Let’s just say you rent it to someone.
What are they going to send you each month? Well, unless they are deadbeats, they will send you a rent check. They will pay you income for being able to rent your house. This is the first way you can make money as an investor, by getting income from your investment.
This income can be called different things depending on what you invest in. For example, if you buy a bond or invest in a CD, this would be called interest. If you invest in a stock that pays income, it would be called a dividend. Doesn’t really matter what you call it. It’s all just income. You are getting paid rent, so to speak, because you own the investment.
So, the first way to earn money as an investor is from income – rent, dividends, interest – whatever you want to call it.
Back to your rental house. Those monthly rent checks are nice, but now let’s also suppose the value of the house goes up. Maybe you bought it for $100,000, and now because Justin Bieber moved out (yes, moved out!) of the neighborhood, prices skyrocketed. Now if you were to sell your house, you could get $150,000. This is the second way to make money as an investor. The price of whatever you invested in could go up.
This is also called appreciation, growth, or capital gain, and it’s not limited to your rental house. Let’s say you bought a stock for $10 and now it is worth $15. That $5 that it went up in value is appreciation.
Sometimes an investment, like your rental house, may provide both income and appreciation, but some investments only provide one or the other. That’s okay, too.
These are the two primary ways an investor can make money: income and appreciation.
If your investment doesn’t provide either of these, it’s probably not much of an investment.
The proceeding blog post is an excerpt from Get Money Smart: Simple Lessons to Kickstart Your Financial Confidence & Grow Your Wealth, available now on Amazon.