Investor Education - Investor 101
Should I Save or Invest? (Do you know the difference?)
The terms saving and investing are often misused and confused. If you are planning to do either, you need to know the difference. Investing is when you use your money to purchase assets – for instance stocks and bonds- that you own as property. When you save however, you place your money in a bank, credit union, or other similar institution to allow your money to accumulate over time, while gradually adding to your initial amount.
Your investment can earn income for you in a variety of ways, whereas saving does not. For instance, you can receive stock dividends or interest on bonds interest throughout the year. If your stock happens to increase in value while you own it, you will earn the capital gains when you sell that stock at a profit. Generally, the profit you gain from investments is more than what you would usually gain from a savings account.
However, saving is less risky than investing. When saving, your money is guaranteed to be there, but when you invest, you may run the risk of losing some or all of your initial investment, based on the amount of risk you decide to take. The fact that the returns from investments can be so significant at times tend to motivate individuals to invest, rather than being limited to only saving accounts.
When managing an investment, homework has to be done on the investment product you would like to get into, before you place your money in it. Ensure that you know everything you are supposed to about the product you are buying, for instance how much risk you will be taking on, as well as if the product suits your financial needs. If you are using an investment advisor, ensure it is someone credible, has the necessary expertise and is licensed to give advice.
You have to consider your goals as well. It is general knowledge that people invest with the intention of making more money, however, ask yourself how much money you need, and the time in which you would like to achieve that target, as well as what you want to use it for. These will be your financial goals and will contribute to the kind of investment product you seek (long or short term).
Your style of investing is also important to bear in mind. Know your tolerance for risk, that is, how much risk you are willing to take on, as well as how much you can afford to take on. Both saving and investing are imperative to your financial plan. Aim to manage them wisely, so that the reward will be great. Ensure that the option you choose, will facilitate you in achieving your particular financial goal.
The Importance of Investing
Investing can be considered as preparation for financial health. As children we learn from our elders that we must save for a rainy day. Like them, we may choose to save in commercial banks, credit unions or through insurance-based investment schemes. There are, however, other, more profitable ways in which to invest. If we should buy a car, house or even an article of clothing, do we not expect to get value for our money? Therefore, why should the same principle not apply to our investments? Investing is serious business, and as such, the interest rates, the benefits, and knowing how to manage your money, is of the utmost importance.
Find the best possible investment
To appreciate investing, a simple understanding of the investment rule… -"The Rule of 72"- and compounding (compound interest) is required. Not all investment rates are the same; different methods are used to calculate interest earned. The "Rule of 72" allows you to understand the relationship between interest rates and the time it takes for your money to double. Divide the number 72 by the percentage rate you are earning on your investment. For example, if you are earning 6% interest on your investment, it will take 12 years for your money to double (72 divided by 12 is 6). At 12% interest it takes 6 years! What you need is as many doubling periods as possible from your investment. How do you do this? You find the best possible investment offering the most competitive rate.
Your money needs to work harder because of ever changing policies
In order to know if you are truly creating wealth, you need to know what your financial institution does with the money when it is handed over to them. Usually it is invested in the Jamaican, Caribbean or world economies. Having worked hard for your money, your money should work even harder for you
Your money needs to work harder, because of ever changing fiscal and monetary policies pursued by the government and, of course, inflation. Many persons who invested in the Jamaican economy between 2003 and 2004, in instruments such as equities or Government debentures, have seen their money double!
Investment houses provide sound advice to its clients
Prepare a detailed budget. For one month, write down all your expenses. Look at these expenses and categorize them. We sometimes do not realize how much we spend until we see it on paper. This is a great way to determine how much you have been spending, and on what. You may be surprised to find that you are spending up.