Investing Money | Achieving Your Long-Term Financial
money simply means putting your money to work so
that it can make more money to achieve your desired financial goals.
There are some financial goals that may never be achieved in your
lifetime or would be a painful process to attain them if you only saved
money on them.
The Differences Between Saving And Investing
Many of us use the words “saving” and “investing”
interchangeably, but they are quite different.
Saving is putting aside some money in a safe place or
financial product such as in a bank or money market account where it’s
readily available whenever you need it. Saving money is therefore
appropriate for short-term financial goals or needs such as upcoming
expenses or emergencies.
But the safety and ready availability of saving products has a
trade-off. Your money in these products is paid very low interest and
can’t keep up with the inflation. This is why many people put some of
their money in savings, but look to investing so they can earn more
over long periods of time such as five years or longer.
Investing is taking a risk with a portion of your savings. You
can invest in stocks and bonds with the expectation of receiving higher
long-term returns but with the higher risk of losing your principal.
However, unlike bank savings or money market accounts, stocks and bonds
have historically outpaced inflation.
Therefore, start investing money:
To make it grow fast.
To beat inflation.
To secure your financial future.
Initial Investment Steps You Should Take
But before you start investing money,
consider these initial steps that you are required to take before
putting any of your savings into an investment:
Work to Balance your Budget: Often
people must learn to live within their means before they begin
Obtain adequate Insurance Protection: It
is essential to consider insurance needs before beginning an investment
plan. The types of insurance and the amount of coverage will vary from
one person to another. Examine the amount of insurance coverage for
life insurance, hospitalization, home and other real estate properties,
vehicles, and any other assets that may need coverage.
Start an Emergency Fund: Most financial
planners suggest that an investment plan should begin with the
accumulation of an emergency fund.
Pay off all your Debts: It's always a
better idea to pay off your debts before you invest even a cent. If you
have debts, work out a plan to pay them off first. Clear your debts
like credit cards, overdrafts and personal loans.
If you have any additional or extra money at the end of each
month or if you have some money saved up for investment purposes, you
may want to start investing money. But in order to establish which
investments are appropriate for you, you need to consider the following
Goals and Needs: You may have specific
financial goals that you want your investment portfolio to fulfil. For
example, your children's college education needs, retirement needs or
business start-up capital, travel plans e.t.c.
You should not invest without having an ultimate,
clear-cut financial goal. Set financial goals by writing down what you
want to accomplish and by when. Having a plan can help you get where
you want to be.
Age: Your age is an important factor
to consider when deciding how long you should invest and how much risk
to take. The younger you are the more time you have to invest; so you
may want to take on more risk. On the other hand, if you’re nearing
retirement, you might decide to be more cautious about where you put
Occupation: Your occupation can affect
your investment objectives. For example, if your job doesn’t provide an
adequate retirement plan, or may need to fund your retirement from your
own savings and other investments.
Time Frame: When do you intend to
offload your investments? You need to choose the maturity of the assets
you intend to invest in. The longer you are prepared to invest, the
greater risk you may be prepared to take.
Wealth: The types of assets you
currently hold will affect the level of risk that you are prepared to
accept when investing money.
Liquidity: Liquidity is the ease with
which you can convert your assets to cash at fair market value. It is
important to consider the need to convert your assets into cash at the
appropriate times to meet your financial needs.
Fixed Deposits are most liquid and you can
liquidate them anytime without any capital loss.
and Unit Trusts Funds are not as liquid as
deposits and investors can suffer capital loss depending on market
price of the bond, T/Bills or the unit trusts.
volatile and their liquidity
varies. They should not be considered for short-term investments.
more difficult to liquidate than
Tolerance for Risk: How much risk can
you stomach? The answer to that question normally depends on two
factors: age and purpose. The older you are, the less risk you can
afford to take, because it’s more difficult to replace the money. If
the purpose of the money is for retirement or education and both are
still far away, you can probably afford to take a higher risk.
However, if you need the investment funds to live on right
now, then you need the lower risk, regardless of age.
Sources of Investment Risk
There are several sources of risk that you should consider
when investing money:
or a down-turn in an industry can lead to loss or lower returns.
Stockholders in a company that goes bankrupt may lose all the money
A decline in the
economy may result in a drop in an investment's value. Stock in a chain
restaurant might drop in value when there is more unemployment and
consumers cut back on eating out.
Risk: Future rates of
inflation will affect the purchasing power of an investment. An
investment earning no more than the inflation rate is losing value
after income tax is paid.
Risk: This is the risk
not being able to sell an investment at a reasonable price. It may take
months or years to sell real estate in a slow market.
And if you do not have enough knowledge about the
you intend to invest in, you may wish to consult a qualified investment
advisor to advise you on how you should invest your money.