Save and Invest - Part I
In our last discussion we looked at the basics for developing a budget. Once your budget is in place, you should now be able to identify an amount to save monthly. The question is WHERE are you going to put your savings? By investing, you put the money you save to work making more money and increasing your wealth.
An investment is anything you acquire for future income or benefit. Investments increase by generating income (interest or dividends . . . topics we'll cover later) or by growing (appreciating) in value. Income earned from your investments and any appreciation in the value of your investments increase your wealth.
There is an art to choosing ways to invest your savings. Good investments will make money; bad investments will cost money. It is important to do your homework. Gather as much information as you can. Seek professional advice from your bank or other trained financial experts. Read newspapers, magazines and other publications. Identify credible information sources on the Internet.
When you are saving and investing, the amount of expected return is based on the amount of risk you take with your money. Generally, the higher the risk of losing money, the higher the expected return. For less risk, an investor will expect a smaller return.
For example, a savings account at a financial institution is fully insured by the Federal Deposit Insurance Corporation up to $100,000. The return, or interest paid on your savings, will generally be less than the expected return on other types of investments. But, you have the assurance that although you may not make a whole lot in interest, you are guaranteed never to lose your principal.
On the other hand, an investment in a stock or bond is not insured. The money you invest may be lost or the value reduced if the investment doesn't perform as expected. However, your chances for earning a higher return are usually greater.
How much risk do you want to take? Here are some things to think about when determining the amount of risk that best suits you.
Financial Goals. How much money do you want to accumulate over a certain period of time? Your investment decisions should reflect your wealth-creation goals.
Time Horizon. How long can you leave your money invested? If you will need your money in one year, you may want to take less risk than you would if you won't need your money for 20 years.
Financial Risk Tolerance. Are you in a financial position to invest in riskier alternatives? You should take less risk if you cannot afford to lose your investment or have its value fall.
Inflation Risk. This reflects savings' and investments' sensitivity to the inflation rate. For example, while some investments such as a savings account have no risk or default, there is the risk that inflation will rise above the interest rate on the account. If the account earns 5%, inflation must remain lower than 5% a year for you to realize a profit.
Investing is not a get-rich-quick scheme. Smart investors take a long-term view, putting money into investments regularly and keeping it invested for 5, 10, 15, 20 or more years.
In our next update, we'll take a look in more detail at types of investments, such as stocks, bonds, mutual funds, and annuities versus savings accounts and money markets. As always your questions and input are welcomed. Email me at Yvonne@glasshouseministries.org
