This is Stage 7: Invest—Letting your money work for you. Before reading this article, please take the time to read:
Stage 1: Know your financial status
Stage 2: Determine your goals
Stage 3: Develop a plan
Stage 4: Buy insurance for income protection
Stage 5: Be debt-free
Stage 6: Invest—Letting your money work for you
Investing is using money in a way that you can expect earnings. It has two main goals: preserving your worth by beating inflation and growing your net worth through earnings.
Beating inflation by investing
When you put coins in a piggy bank, the value of your savings remains the same but its worth lessens by the passing of time because of inflation.
Inflation, the general increase of prices, chips away your saving’s ability to purchase goods and services.
Investing allows you to preserve its worth by providing earnings that match the rate of inflation, making sure that you will still have the same purchasing power in the years to come.
Grow assets by investing
Investing also allows to you have the potential of earning in order to grow your overall net worth. It can give you a chance to gain passive income.
Different types of investments
There are different types of assets that you can invest in.
- Cash. Deposit accounts, checking account, and time deposits are examples of banking products that provide steady return through interest.
- Real estate. Properties such as a lot, condo and apartment may provide earnings through rental income and appreciation of value, giving you profit should you decide to sell.
- Business. A business venture is also another form of investment, as you expect to get profits.
- Securities. Also called paper assets, they can be any contracts that show you are lending a person, company, or government an amount of money. They can also be any written evidences that you own a share, have interest, or participate in a business, making you entitled of any profits or loss that it gets.
We can break down securities further into:
- Stocks are anything that represent a part of ownership of a company. It can sometimes be called shares and equities, although there are some little differences. The earnings are through interest, dividend or
- Fixed income are anything that gives regular earnings through interest or dividend.
How can investments earn money?
There are several ways an investment can earn money, also called returns.
- Capital gains. You gain profit through buying low on investment assets (like real estate) and selling high.
- Interest. You get income through the interest from money you lend to someone, a bank, and other institutions.
- Dividends. If you own shares of a company or a participating life insurance, you have a chance of getting a share of the business’ profits or the returns of the policy.
Different investments carry different levels of returns. The table below show different types of investments and the potential for returns.
|Securities||Depends. Stocks has a potential for higher returns than fixed income.|
What is investment risk?
When you invest, you take on some degrees of uncertainty that you might not realize returns. The value of your invested amount might even decrease, especially during recession. This is what is called risk.
Different types of investments carry different level of risk.
|Securities||Depends. Stocks carry higher risks than fixed income.|
What is risk profile?
Risk profile shows how willing you are to take on risk. You are an aggressive investor if you are willing to take high risks. If you rather want to own less risky assets, then you are a conservative investor. If you are in between, you are a balanced investor.
What is the relationship between returns and risks
Risks and returns are related, as you can see from the tables above. If you buy a risky investment, the higher the returns it can give you. However, if you buy more stable investments, it is likely that you get lower returns.
What is liquidity of an investment?
Liquidity means the ease in which an asset can be converted to money.
Different types of investments have varying levels of liquidity. A deposit account with an ATM (automated teller machine) card is liquid because you can withdraw money at any time from any cash machines. The same cannot be said of an apartment, which is not easy to sell and therefore not as easily convertible to money.
Why is liquidity important? It can be a factor in deciding what to invest that fits to your circumstances. If you are older and about to retire, you might want to have more liquid assets to add to your available cash. If the purpose of your investment is for short- to medium-term, you may also want to get into liquid assets so you will not have any issues getting your money when the time comes.
How do you invest
You can invest in the following:
- acquiring a property that can generate passive income
- starting a business
- buying direct shares from the stock market
- opening a managed fund (mutual fund, UITF or investment-linked policy)
Investing is an important part of financial planning.
- Take the time to check the plans you have made with your goals, and see how investing can help you achieve them.
- Make sure that you know your risk profile, and invest only in assets that you assets that match your willingness to take risks.
- Get in touch with a financial advisor to help you make and implement financial strategies, teach you on products that you can invest in, and help you build a strong financial foundation.