Forbes magazine stated that the concept of “making money work for you” has become popular among individuals seeking to build wealth, but it can be misleading if not properly understood.
The Forbes report highlighted the different ways money can work, explaining that transitioning from liquidity to investments involves significant changes in risks and potential returns.
What does “making money work” mean? Forbes clarifies that there are three main aspects of using money effectively:
- Wise use of money: through proper management of expenses and savings.
- Maximizing income: by achieving the highest returns from different income sources.
- Investment: by turning money into financial assets like bonds and stocks.
Despite the importance of all these factors, the article mentions that the term “making money work” is often associated with investment, a field that carries greater risk compared to holding liquid cash.
Liquidity vs. Investments Money is generally known as a medium of exchange, a store of value, and a unit of account. However, once money is moved from cash to investments, differences begin to emerge:
- Cash is the most liquid and stable asset: it can be used directly at any time.
- Bank accounts are close to cash but less liquid: they are loans provided by banks to account holders, with limited government guarantees.
- Certificates of deposit (CDs) are less flexible: they impose restrictions on early withdrawals and may carry financial penalties.
- Bonds require liquidation before use: their value can rise or fall based on interest rates.
- Stocks are more volatile assets: they reflect company performance and are subject to market factors.
Forbes warns that treating stocks and bonds as if they were cash can be a common mistake, as their value is not fixed and can experience significant fluctuations, potentially leading to unexpected losses for investors.
Investment Risks One of the biggest mistakes investors make is assuming that invested money will return to its original value regardless of poor market performance. Forbes provides several examples of investors falling into this trap:
- An individual invested $100,000 in stocks, which then dropped to $75,000, but they remain convinced it will return to its previous value.
- Another invested $100,000, and the value increased to $125,000, only to later fall to $105,000, yet they believe the price will rise again.
The article suggests that such assumptions can lead to poor decision-making, as investors assume their invested money is immune to loss, whereas the reality is quite different.
How should investments be handled? Forbes advises investors to change their thinking about investments and avoid using the term “making money work” as it can be misleading. Instead, they recommend:
- Understanding that investments involve risks and are not just another form of holding cash.
- Translating any talk of “making money work” into “buying financial assets that involve risks,” which reflects the reality more accurately.
- Understanding the nature of each investment tool: bonds carry credit risks, stocks are subject to market fluctuations, and real estate may be affected by broader economic conditions.
- Maintaining realistic expectations about returns and not assuming any market decline is temporary.
Why is critical thinking about investments necessary? Forbes explains that many people confuse liquidity with investment due to using the dollar as a unit of account, which leads them to view all assets from the perspective of their cash value only. This can result in overconfidence in market stability, while financial markets are merely a reflection of supply and demand expectations, not a fixed value of money.
Thus, the correct way to manage money requires understanding the nature of different financial assets, distinguishing between cash and investments, and developing investment strategies that consider the real risks of the market.
