You’ve been living below your means; you’ve mastered the art of budgeting; and you’ve managed to stock up quite a large nest egg. Now you can finally experience the financial freedom that experts have been harping about, right? Not quite. Sure, budgeting and saving are essential to financial independence but they’re just one part of the equation. If you want to get to the next level, you have to learn how to make your money work for you. And that’s where investments come in.
What Are Investments?
Growing up, we were taught that we have to get a job and put in the hours to earn money. In order to earn more, we have to work more hours. But our bodies have limits–we can only work for a certain number of hours before feeling tired and burned out. So, to maximize our earning potential without working ourselves to death, we need a different way of making money–and that is through investments.
Determining Your Risk Profile
There’s one major difference between paychecks and investments that need to be pointed out–paychecks are guaranteed; investments are not. While you can expect to get the same amount of money every payday, the income you get from investments fluctuates. Sometimes you can earn really big profits; other times, you can lose part or even all of your money. So it’s crucial to determine your how much risk you can tolerate before you even start investing.
There are many types of investments out there, each with their own associated risks, and it’s important for investors to understand the details before committing to a certain product. Risk profiling is the process that most financial institutions use to classify investors’ risk appetite and to match them with the right investment products. This usually comes in the form of a questionnaire about the investor’s financial status and outlook to determine what type of investor she is. Here’s a quick breakdown of the common types:
Common Types of Investments
Now that you have an idea of what type of investor you are, it’s time to look at the different investment vehicles available in the market:
- Time Deposits – these are money deposits in a bank that cannot be withdrawn for a certain period of time (usually months or years) unless you pay a penalty. They have slightly higher interest rates than normal savings accounts. The longer the term of the time deposit, the higher the returns.
- Fixed Income Securities – these are investments that are founded on debt, and provide fixed returns over a certain period of time. The most common type of are government or corporate bonds. When you purchase bonds, you’re lending out your money to the government or a company. In return, they pay you interest on your money, and eventually pay back the principal amount they borrowed.
- Mutual Funds – these are pooled funds from individual and corporate investors that are invested in various financial securities like bonds, stocks, etc. In return, investors get shares of the fund that they can redeem or exchange for cash in the future. Mutual funds are managed by professional fund managers who determine where to invest, in order to produce income for the fund’s investors. Mutual funds are offered by investment companies and often come with entry and exit fees.
- Unit Investment Trust Funds – also known as UITF, these work in the same way as mutual funds. Investors’ money are pooled and invested in assets that make up the UITF portfolio, and the investors get units of the fund which they can redeem for cash. The main difference of UITFs from mutual funds is that they are offered by banks and are managed by the trust group of the banks.
- Stocks – also known as equity or shares, a stock gives you a stake in a company and its profits. When you purchase stocks, you become a partial owner of a public company and make gains if the business is doing well.
Why Should You Invest?
Still not convinced that you should start investing? Here are some compelling reasons that will erase your doubts and get you on-board the investing train:
To beat inflation
We all know that the prices of goods are increasing every year. What you can buy with P100 now is a lot less than what you can buy 10 years ago. If you just keep your money in the bank as inflation kicks in, your money just loses value. But if you invest it, you get above average returns that help you beat inflation.
To reach your financial goals
If you dream of building your own house someday or retiring in a lovely beach island, investing can help you hit your targets much faster because of the potential high returns. You won’t have to rely on loans or work three jobs to save up for a certain goal because your investments are earning the money for you.
To attain financial freedom
When you invest, your money generates more money for you. It adds on to your income without any extra work or effort on your part. You’ll always have something extra in the bank and you won’t ever be financially short or worry about money.
PHOTOS: Pixabay, Mike Dee