Think about that extra bit of available money not tied to a future required payment.
This is money you can use freely.
For example, you can indulge yourself with an immediate purchase or you can invest your money for a future return. You can even afford to lose it, so you can take some risks without affecting your peace of mind or you capacity to cover your current expenses. Sometimes you have a savings plan for a specific goal: a car, a special vacation, education, home, retirement, etc.
The money you put aside to pay for those future expenses needs to be available in the not-so-near future. The longer you don’t need it, the more you will want to explore how you can use it to help generate more money. Because you can be patient, that money can generate more money. If you want to have a reward later for not spending the money now, you are investing. You can wait some time to receive a reward, and even if you lose it, your current payments are not affected [though if you run short of money in the future, your ability to make future payments may be affected by the money you lost today].
If the use of that money is not tied to a clear purpose in the next few years, you might want to take a more active role with it — investing it in shares, real state, art, metals, or other assets.
Most investments depend more on external conditions than on your capacity to create wealth. Others investments decisively depend upon your actions.
For example:
- If you put your savings into a bank account, the amount of money you earn will depend more on the decisions the bankers make about the cost of capital than on your own decisions. After all, you delegated the decision process, and thus you don’t spend much time on it.
- Use a mutual fund or an investment broker when you are a little bit more active and therefore expect a higher reward.
- Buy a property and manage it, making sure you have tenants, paying for repairs and taxes, etc.
- Invest in another person’s company and take responsibility for participating in the company’s strategy, ensuring that the money invested is generating the rewards you expect as a shareholder or a member of board of directors, or
- Set up your own company, and work both in strategy and implementation, building its value with your ideas and your day-to-day activities.
All these examples assume that you have the capacity to risk money because you feel that you have full ownership over that money. You wouldn’t risk any money you needed to pay your rent, or your electrical bill, or your car or credit card. You couldn’t wait a few months to have access to this capital either. You might, however, invest a discretionary portion of your money to take some risks. This capital can make you feel empowered and creative.
Welcome to the Equity Mindset: this is money that is available to you to take responsible risks. You choose your involvement — you can be patient and you can “afford” to lose some money.
Examples of Equity funding include: Founders, Family and Friends (3Fs); Equity Partners; Angel Investors; and Venture Capital Funds.