Tuesday, November 10, 2015

Basics of investments

This post comes courtesy my husband who likes to read a lot about investments and financial planning. He says:

If you're satisfied with living on a paycheck that simply covers your present day expenses , then you need to change your financial attitude immediately. 
This is one of the many ways to ensure that in your old-age, you will be living on hard times. 

Old-age benefits, pensions , etc. cannot support your current lifestyle in the future. Even if you are saving up cash now, keep in mind that inflation eats up the value of your money. A dollar tomorrow cannot buy the same things that a dollar today can, so simply saving cash will not do the trick.

Any excess money above and beyond the emergency fund should be invested so that the money goes to work for you and increases your wealth . When you invest, you spend money to acquire a thing of value, i.e an asset.

The different avenues of investing include: real-estate , shares/stocks, mutual funds, commodities, etc. Each investment can have a different purpose, i.e it can be held by the investor because it increases in value or it can generate a periodic income .

Starting out:

When you start out, you won’t know what the best type of investment for you is. It is, therefore, important that you initially invest in the most defensive manner possible.

In other words, put your money in highly reliable and low risk investments. These are likely to generate less income, but this accounts for security. Don't be enticed by investments with high returns, because, inevitably, they also entail high risk of losing your investment.

For a moment, consider what you would have to go through if you lost your investment – and remember to keep this advice close to your heart.

Another method of ensuring the security of investment is to diversify, such as spread your savings to different types of investments. This way if one investment is doing poorly, the others will provide you a cushion to any losses.

The easiest way is to put your money in a reputable mutual fund where an experienced person will manage your money to keep it safe and profitable. The amounts required are low and can be built upon with time.

Where to invest:

A good investment is something that benefits you during difficult times or when an important need arises. You can invest your money in real estate, shares/stocks, mutual funds, commodities, etc.

Each investment can have a different purpose, i.e it can be held by the investor because it increases in value or it can generate a periodic income.

For example, you may invest in the stock or shares of a company. If it is a stock of a good company, i.e if the business fundamentals of the company are good, then you may periodically receive dividends from the company as it earns profits. With time, the value of the stock may also increase as the company grows so that when you have to sell the share, you will sell it at a profit.

With some assets, you need to continue spending money on them even after you have acquired them. So, if you buy an apartment, the apartment will be generating an income for you through rent.

However, you will be spending money on maintenance and property-tax As long as the balance of expenses and income means that there is (a) a net inflow of cash and (b) in a suitable amount, then that investment may be considered fruitful.

Educating yourself is the most important investment you can make and the one which will generate the greatest returns. Don’t take this casually. Otherwise others and not you will be in control of your money.

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