- August 19, 2020
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There are two main ways to generate money – earning an income and growing assets through investments. These investments can take a variety of forms. Some persons invest in real estate. Others invest in companies through shares. Generally, though, people invest with specific goals in mind.
One of the main goals is to generate a higher return. Putting money in a fixed bank deposit, for example, typically provides significantly less returns than if invested in a Mutual Fund. People choose this option to generate more money over time. This means they are not looking for a short-term payoff but are investing toward a long-term goal using compound interest to their advantage. Compound interest is the addition of interest to the principal sum. Basically, its interest paid on interest, something that will not be gained using traditional savings accounts.
In addition to the returns, investing also for the diversification of assets and access to additional resources. Investors that have stocks and bonds may be able to borrow against them at a much lower rate than traditional consumer loans. They can also leverage their portfolios, using the borrowed capital to purchase additional securities thus increasing their portfolio's potential earning power.
Most people invest with a view of providing financial security for themselves and their loved ones. This can include investing in an Education Investment Account, for example, that can provide college funding. There are others who invest in stocks and bonds and pass these down to loved ones, creating generational wealth. In 1931, secretary, Grace Groner, for example, purchased 3 shares stock from the company she worked for at $60 each for a total $180 initial investment. By the time she died, her investment was worth $7 Million.
But is investing for everyone? There are several clues to indicate whether investing is right for you.
The first is that you have healthy savings. This means you have funds that you will not need in the short term in addition to an emergency account with a minimum of six months of your regular income. You should not invest using funds from your emergency fund. You want to invest money you can afford to live without for 5 to 10 years.
Another clue investing may be right for you is that you have control over your finances. This means your expenses don’t exceed your income and your debt is also under control. If you have high-interest debt and credit cards, the payments should all be up to date. The key here is that investing takes discipline and should not cause you financial strain.
Investing may also be right for you if you have medium to long-term goals that you need to finance. Again, investing is about the long game and your returns will likely be better the longer your money is invested. If?you?expect to need this money within 5 or fewer years,?investing?is likely?not for?you.
You should also consider whether you have the risk tolerance for investing. There is always a risk, even with low-risk investments. If you have difficulty taking on any risk, investing if probably not for you. However, you should speak with an investment manager who will be able to go over your options with you.