You are reading this short course because you might have heard about investing, but you don’t know where to start. Don’t worry. I was once like you.
This is first part in a series of articles about the basics of investing. And it is my hope that after you completed the course, you will walk away confident in managing your money wisely on the roadmap to your financial freedom.
Investing: knowledge and opportunity
Investing is about knowledge plus opportunity. The more you know, the more opportunities you will recognize and the better you are at growing your money.
Let’s start by talking about asset: it is anything that has cash value. The ultimate goal of financial planning is to let you accumulate asset that then provides a level income that you can live by reasonably without having to work. There are many types of assets, but we are going to focus on paper assets such as bank accounts, time deposits, stocks, bonds and managed funds.
But why do we need to know them? Because there is opportunity to earn income passively. To start, say that you have P10,000 spare cash. Let’s compare the returns in 10 years if you choose to hold on to it, put it in a savings account, invest in securities that earn 2% and 5%.
|Time||Cash||Savings account||at 2%||at 5%|
In the table, you will see that savings account in a bank performs better than keeping all your money with you. And, let me tell you, the table shows a savings account that earns 0.25% annual interest rate, which is already considered high in the market today.
But it does not compare to investing that earns 2% and 5%. In fact, the investment at 5% earnings will double your money in 14th year (about P19,799).
So imagine if you have not spent P10,000 fourteen years ago and instead saved it in a fund that’s giving you 5% earnings compounded annually, you would have been twice as rich today.
Investing today versus investing tomorrow
As the above example shows, time is an important factor in investing. The longer that you have started, the better is your potential income becomes.
Let me illustrate how time plays a crucial role.
Say that three friends of the same age were introduced to investing at the same time. Person A started right away by investing P100,000, while the other two didn’t. Ten years after, Person B (who is now 35 years old) followed suit and invested the same amount. Finally, after ten more years, Person C (who is now 45 years old) decided to do the same thing and invested the same amount.
Question: Which of the three friends earned the most when they retire at age 65 and decided to sell? Let’s assume that all three of them have the same investment that earned 10% interest compounded annually.
|Age||Person A||Total||Person B||Total||Person C||Total|
All three of them saved the same amount, have the same type of investment and have the same exact annual interest. But Person A will have the highest gain when they retire at age 65 because he started the earliest. The result: his net worth is almost twice than the other two combined!
The above is not magic. This is the effect of time and compounding interest with the growth of your money. The above table also illustrates that there is cost with waiting. When you wait a little longer, you will gain less than the one who started earlier.
So when was the best time to invest? Yesterday! But today is already good enough.
So what should you do to start investing
Of course, there are a lot of other things that are at play. For example, the above examples do not include the costs associated with buying and selling of your asset. It also did not include taxes into account.
In addition, they did not consider what investment funds are and their associated risks. And this is the topic I’m going to cover in the next chapter. So click Continue, and off you go.Tags