Sometimes, I look at all the different type of financial planning buzz words and investment it makes my head spin. Although I can grasp complicated concepts and ideas, I found most people either don’t have the time or the inclination to want to do so. I think the greatest leaders often simplified their ideas to just a few lines.
Abraham Lincoln Gettysburg address, one of the most famous speeches ever made, invoked the people to action in less than 300 words only in about 3 minutes. Winston Churchill’s famous World War II speech for his nation to “Never Give In†was fairly short too, although it propageted the myth that Churchill spoke only one sentence,
So I believe, financial concepts can and should be made simple. If your granny or your kids can understand it, then it is just about right. I’ll attempt the same here.
Investments – if you use an apple and an apple tree as an analogy, the first apple would be your capital outlay. Let’s say, you work and get an income of 2 apples a day. You can eat both your apples and be filled for a moment, satisfying your hunger. Tomorrow, after you worked several hours, you’ll get another 2 apples again.
Now, you and I know that this will go on. If you want to grow your money, i.e. have more apples, without working harder, then, you could choose to eat just one apple and plant the other apple. Yeah, you are trying to control your consumption by eating less, and planting or investing for the future. After planting the apple seed, does the tree grow overnight? Definitely not. Some of the apples you planted might not grow or produce fruits. These are investment that did not work out. And for others, you might have to wait for several years before it bears fruit.
In the early years, you have to nurture the tree. The same with most investments. In the initial years, you would not gain anything from the fruit you have sacrificed. But over time your apple tree would bear much fruit. The new fruit is like interest. You can again choose to either eat all the fruits or reserve some for planting for future. If you plant some again, i.e. reinvest some of the apple for another tree, now you have several trees producing 3 to 5 times more fruit. Now the apple trees become cash cows for you generating income, not from your own 8-10 hours of working time. Makes sense?
Now, assume another analogy. Let’s say you inherited an apple tree, with 50 – 100 apples on it. You can cut down the tree, sell the apples one time and then sell the wood in the tree as well, but, that would be a short sighted move.
However, in real life, perhaps for the fact, many people don’t plant trees anymore, many people do just that. They get a bonus, or pay rise, not only do they spend all of it; they buy an item that needs maintenance like a new car or boat.
So, in order to move ahead invest in things that grow and produce fruits. To take it further, some breeds or trees produces more fruits than others; there are the different types of investment. Some generate more income over a shorter period, while others take longer, but produce more. Some need more care, others hardly any.
This is a very simple analogy. In the real world, trees get damaged, attacked by insects, or competitors come up with better methods of planting etc. The same things happens to your investment. It the ways the game goes. Learn to enjoy it. Don’t get too worked up over it.
Imagine that it is just apples and apple trees. Let the tree reminds us of that.
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