Does money stick to money?

Does money stick to money? That’s the question my seven year old asked me recently.
I was explaining to my children how money grows. My girls wanted to know how one earns lots of money and asked if they worked really hard, for many hours would they earn lots of money? I answered that hard work does pay off but investments grow better. If one had to work all the hours of the day, one would still earn more by investing ones money. My eldest, asked how does it work? Does other money stick to your money? A good question! And yes, it does. Money sticks to money; investments attract growth.
Inflation is an eater of money – it depreciates the value of money. Annually our money depreciates by inflation. What we can buy today for R100 will cost us R100 plus inflation next year. When we work, we earn an income from which we buy goods and services. We can use all our money we have earned to purchase the goods and services we require to provide for our daily needs or we can reduce our budgets and set aside a little. When we set money aside we can invest it and aim to achieve a growth higher than inflation. If we achieve a growth of double inflation, the money we have invested would have not only beaten inflation but grown by the same amount as inflation.
Different asset classes give different returns. On average money markets or cash will give a return of inflation; bonds of inflation plus 2%; property inflation plus 4% and equity or shares, inflation plus 6%. Ideally you want to earn above inflation and the more aggressive the investment the higher the return. A good diversified investment portfolio will exceed inflation and even with a downturn in the markets, investors are better off than if they had not invested. The more one invests, the better it grows. Money does indeed stick to money!