An investment against saving!

What is an Investment?

An investment, on the other hand of saving is solely structured for wealth creation. This is money that you put aside with the understanding that it will not be needed for many years, the exact number of which differs from one individual to the next.

Investments involve greater risk, but, investments must also yield much greater returns when left alone long enough to ride out the turbulence of the stock market. When you're investing, you give your assets the potential to grow over time. You typically reinvest your interest, dividends, and capital gains earned.

Often you are prepared to take a little more risk with investment money than you are with your savings. With the opportunity for growing your money comes the risk that your account value may decrease. If you have many years before you need the money to reach a goal, such as your child's college education or your retirement, you may have time to recover from small decreases in value.

When you "invest," you have a greater chance of losing your money than when you "save." Unlike insured products, the money that you invest in securities, mutual funds, and other similar investments is not risk free. You could lose your "principal," which is the amount you've invested. That’s true even if you purchase your investments through a bank. But when you invest, you also have the opportunity to earn more money than when you save.  There is always a tradeoff between the higher risk of investing and the potential for greater rewards.

When you invest, you are buying an asset that you expect to grow in value. Since the value may fluctuate, it’s best to invest money that you probably won’t need in the near future. You will want to be able to sell when the market conditions are favorable, not on short notice.

Investment choices range between

§  Individual securities — such as stocks and bonds

§  Pooled investment products — such as mutual funds and exchange-traded funds

§  Estate planning and real estate

§  Retirement plans

§  Rare investments like art pieces and precious metals

You will need to find investments that fit your goals, time horizon, and risk profile. If the investments you choose make you nervous or uncertain about your future, you may be in an investment profile that’s too aggressive for your risk tolerance.

Getting the most from your money means understanding the difference between saving and investing — and how to use both. Saving alone may not provide the opportunity to grow your money at a sufficient rate. Yet, relying solely on investing could leave you without easy access to enough money in an emergency.

Understanding the difference between saving and investing helps you put your money to work toward your goals and then ensuring that goals are not just dreams but that they become achievable

Are you Investing or Saving?

Investments Simplified

Are you Investing or you are Saving?

What is the difference?

Most of you have been waiting impatiently, claiming to be ready – asking when are we going to really discuss the types of investments. I am glad to say that “finally, we are here”.  It is now time to get to the most exciting part of all this. We have built the block, one by one; we have crafted our inner beings and prepared ourselves for the way forward (at least I hope that we have through the different topics that we have explored thus far). Now it is time to talk about Investments. Are you ready? I now that I am…..

 

First discussion point - Are you an investor?

Whenever you look at yourself – do you see an investor? Do you know what we mean by an investment? Take a moment and think about it, what is an investment? And, would you say that you qualify as an investor? I only ask because in more instances than I would have liked, many confuse “savings and investments”.

And in this society, I find that, many use the words interchangeably like they mean the same thing, and that many more are savers, but very few are actually investors.

 

So what is an investment?

Most of us instinctively may know that saving and investing are not the same, but do we understand the difference? Clarity in this distinction can greatly impact one’s financial wellbeing; can define a winner and a mere survivor. Realizing these differences is vital. Knowing the difference, and when to choose each, can help you reach your financial objectives. In the end, when you actually have decided to invest – know that a mix of both may be the optimal strategy.

The key to fully understanding and putting these into practice lies in these two words: risk and liquidity.

 

Savings

These are low risk funds that must be liquid (available) when you need them. The purpose of saving money is so you can have it for a specific purpose within a short time frame. When you are saving, you are concerned primarily with securing your money, while not losing any of its value. Typically, savings are earmarked for an emergency or a short-term goal. While saving money may preserve your money’s nominal value, opportunities to grow your money are limited.

When you save, you look for a low-risk place to put your money. Depending on your choice, you might earn interest or none at all. How much interest you earn may be less important to you and your needs, than is the opportunity to preventing any loss of money or having access to your money on short notice without penalty.

Saving choices range from the likes of

§  Savings accounts

§  Money market accounts or money market mutual fund

§  Certificates of deposit (CDs)

§  Treasury bill or short term bonds

In this listing, where is your money? If it falls within this category, you have not started investing.

Live to Impress and You will always be Broke!

To have money – You cannot live to Impress

Most of us are blinded so much by the notion of trying to impress others that we forget to really look into our own financial buckets before we spend. We are so busy worried about what she thinks, what he will say when we wear the same dress to the party that we wore last year to the other function, what they will think when we don’t order the shoe that they are all placing an order for, what she will say when we………. The excuses to be irresponsible never end with people I find.

Here are my questions

-       Does she contribute to your financial lifestyle?

-       Will you grow grey hairs on your face if they talk, laugh at you or look down upon you?

-       Will the sun stop shining because you didn’t attend the party you couldn’t afford a dress for?

-       Do you stop breathing because they stopped talking to you; or worse still

-       Say you yield to their pressures and spend Willy-nilly – will they be there to clean up your mess when the shylocks and banks start knocking loudly at your doorstep? Will she, he?

If your answer is no, you have no business worrying or even spending one second considering them in your decision thought process. They do not matter in the larger scheme of your life, therefore do not make them any more important than they actually are

The Mistakes we Make

Yes, we are all human and therefore fallible to being in a position where we will continue to make financial mistakes from time to time - that's just part of life. However, knowing about common mistakes beforehand can reduce your odds of making them. Understanding what it is that is likely to lead you to your downfall can save your skin.

Let us therefore briefly take a look at some of these common spending mistakes:

§  Buying On Impulse

If you are like me, and you will buy a can of coke, a snack and/or a bar of chocolate in the checkout lane every time you go to the grocery stores or filling station and you go to the grocery store twice a week, that seemingly inconsequential purchase is costing you E200 a month, or almost E2400 a year.

And if I am like you, I will be buying that occasional beer every evening, that bottle of wine to enjoy as I distress, and if this becomes a habit – I end up distressing every evening and spending e50 a day which will by week end be over E300 for I will finish the bottle (hopefully not in one day but over a week). That becomes a bill of E1,000 a month on alcohol and by year end, you have spent over E20,000 if you include the weekend binges that happen now and then. Write it down, you will be shocked. 

Add a few other impulse buys at a few other stores over the course of a month and no matter how inexpensive they are individually, they will add up to a number that will shock you.

There's nothing wrong with buying snacks or that bottle of wine now and then, but if you notice by reviewing your budget that you are buying it at a rate of 52 packs a year, you can plan to buy these in bulk at wholesale stores if you must for a third of the price and save money. Or better yet, you can reduce your intake on these that society has classified unhealthy (I who was I to disagree?).

Writing down even those minor E10 purchases every time can help you spend more wisely in the long run.

§  Becoming the Victim of the “I want to look rich” syndrome

We all have had this experience. You go out to do something or buy something expecting it to cost a certain amount of money - an amount you've budgeted for - but when you get home you realize that you ended up spending much more. How does this happen?

Perhaps you decide to go out with some friends on a Saturday night and you think you're just going to a bar, but once you get there the group decides to go out to eat as well, or to surprise another friend who is located some 15km away from where you were originally planning on being, and behold, you do not want to disappoint or show that you may not have catered for the additional fuel. After all, you are already along for the ride, so it's easier to give in to the pressure to join in on the food and trip rather than be the odd one out. In that same scenario, after you've had a couple drinks, money may not seem like such a big deal and you may buy everyone a round against your normally better judgment.

These things happen, and you won't always be emotionally strong enough to prevent them.

However, if you know that you have a tendency to buy more than just one thing when you go to the store, or if you know that your friends have a tendency to change their plans at the last minute, either avoid these activities or create a bigger budget for them ahead of time.

§  Being so Frugal it Makes You Miserable

Budgeting is like dieting: If you try to deprive yourself too much, you will just binge later and throw all your hard work out the window. A spending binge can set you back far more than treating yourself occasionally, so go for the occasional minor splurge. Buy that bottle of wine or those new flowers for your yard. Let yourself take a vacation. Just keep your treats within your spending limits and you'll be fine. This may mean you're saving E1,000 a month instead of E1,500, but it's better than saving E1,500 a month for six months, making yourself miserable in the process, then going out and blowing E5,000 in the seventh month.

 

§  Ignoring the Time Value of Money

It is true that sometimes the cheapest way is not the best way. If milk, bread and eggs are cheaper at one grocery store like Shorprite as most argue, chicken, butter and cereal are cheaper at another like Superspa, I am not convinced that means that you should go to both stores every week to get the best possible deal on each and every item. The time it takes for your to move around, the fuel utilized if you need drive to each does not justify the few cents that you will save from each item.

Besides, unless you have incredible self-control, you will probably be tempted to buy something at the second store that wasn't on your list, thus defeating your whole purpose.

Moving Forward

You may have made the mistakes in the past we all agree, as I have for many times and been caught in a cycle of robbing peter to pay rob, yes – you made mistakes. The key to successful planning however, like life itself, is to learn from them and move forward.

Like riding a bicycle, budgeting and self-control is a leaned habit. Once you get the basics and stick to them you will soon be flying. So – lets go……

Next we start looking at Investment Options!!