Investing 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.
You may also want to read this article: Investing in Gold and Other Precious Metals
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 investing money.
- 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 factors:
- 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 your money.
- 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.
- Savings and Fixed Deposits are most liquid and you can liquidate them anytime without any capital loss.
- Bonds, T/Bills 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.
- Stocks are more volatile and their liquidity varies. They should not be considered for short-term investments.
- Real Estate is generally more difficult to liquidate than most investments.
- 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.
You may also want to read this article: Retirement Planning: Why Save And Invest For The Future
Sources of Investment Risk
There are several sources of risk that you should consider when investing money:
- Business Risk: Poor management decisions 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 invested.
- Market Risk: A decline in the overall 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.
- Inflation 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.
- Liquidity Risk: This is the risk of 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 investments you intend to invest in, you may wish to consult a qualified investment advisor to advise you on how you should invest your money.