Unit Three- Financial Choices
4. Lesson Four: Investing Your Money
1. Explain the difference between saving and investing.
2. Identify ways to invest your money.
3. Recognize the inherent differences in types of investments and relative safety of each.
Investing
When people deposit money in savings accounts, interest is earned and the money
up to a certain amount is protected against loss. But a savings account is only
one way to make money earn more money.
People can also invest by purchasing bonds issued by governments or
corporations, investing their savings in real estate, buying business
enterprises, or becoming part owners in one or more businesses by purchasing
shares of stock in corporations. Life insurance is another form of investment.
An investment that is ideal for one person may not suit another. People with
money to invest differ in age, amount of income, financial responsibilities and
the amount of money they have available. The less money you have to invest, the
less risk you should take. Your first investment should be one that allows the
greatest safety. When you already have safe investments, you might be willing
to risk some money in the hope of making a larger gain.
Before you invest, you should check the following criteria:
Safety- How secure is your investment?
Return- The interest or dividends you expect.
Liquidity- The ease of converting the investment into cash.
Growth- The chances of the investment increasing. Investing money has its risks
and rewards. You should comparison shop for an investment just as you would for
goods and services.
INVESTING: The pros and cons
Pros
Investing has two main advantages over savings.
-
There is often a higher profit rate of return and a greater chance of making a
profit.
-
Investments may grow in value during periods of inflation while savings tend to
remain the same or even lose value.
Cons
In general, an investment is considered “safe” if its dollar value remains
constant. If its dollar value moves up and down, it is called “risky” because
if its value falls, it will be worth less than you paid for it. It is possible
to lose some or all of your money in this way.
Aside from the obvious risk of value fluctuation, there are other “hidden”
risks which affect many investments. Some of these are:
• the erosive effect of inflation on your dollars
• the difference in the tax rates on different types of investment
• income
• the risk of tax changes
• the risk of failure of the business invested in
Usually the greater the risk, the greater the potential return offered to
induce investment.
A wise investment philosophy is to take little risk with money you cannot afford to lose (or at least do without for a while). As you accumulate excess capital over your needs, you may select more risky (speculative) investments in hope of greater gains.
In the principles of investing, it simply means to have your money work for you. When you choose to invest your money and prepare for the future, there are often monetary returns which are associated with these investments.
Why do people invest? People choose to invest because it enables security to be created for the future. Think about it this way, cash sitting in your home, under the mattress is not working for you – it is not accumulating interest and earning money while other people take advantage of it. Investments that are placed in accounts are doing the opposite; these investments are making you money throughout the process. So, what you choose to do with your money can determine your financial style. If you choose to invest, you are taking control – making your money work for you.
Most investors want to make the most of their income and earn enough investment income to be able to retire. Maximizing the income is the reason that most investors choose to invest. Investment has much to do with skill and little to do with luck – if you are looking to get lucky, perhaps you should buy a lottery ticket, but if you are seeking investment income, perhaps you should begin to research the market, the trends and the forecasts for the future in the investments that you have chosen.
Investing requires that the investor make short and long term goals about how they would like to see their investment perform. For example, as an investor would you like to see long or short term gains? This simple question can determine which types of investments would be beneficial for your financial situation.
What does investment require? To some extent, investing requires that certain risks be taken in different financial situations. Investing requires knowledge of the situation of investing and the willingness to continue learning about the subject of investments. Speaking with financial experts, reading financial magazines and newspapers and joining online investment groups and forums are all great ways to learn about investing. It is important to embark on the journey of investing with the willingness to learn, but at least have some investment knowledge under your belt.
There are many benefits to investing, it can help an individual to prepare for retirement and the costs associated with that transition and it can even help parents to prepare for the future of their children by investing in an education fund which deposits are made towards on a monthly basis. With guaranteed returns and options for low-risk investments – it has become easier than ever. With the current state of the economy and low interest rates, now is the time to begin learning, investing and preparing for the future of yourself and your family.
CDs (Certificates of Deposit) A CD is a special type of deposit account that typically offers a higher rate of interest than a regular savings account. Just like savings accounts, CDs are also insured up to $100,000. When you purchase a CD, you invest a fixed sum of money for fixed period of time. Usually, the longer the period, higher is the interest rate. There are penalties for early withdrawal. Money Market Deposit Accounts These accounts generally earn higher interest than savings accounts. They are very safe and provide easy access to your money. They are also insured by the FDIC. They offer many of the services that checking accounts offer, however, a limit is normally placed on the number of withdrawals or transfers you can make during a given period of time. Stocks When you buy stocks, you own a part of the company’s assets. If the company does well, you may receive periodic dividends and/or be able to sell your stock at a profit. If the company does poorly, the stock price may fall and you could lose some or all of the money you invested. Bonds A bond is a certificate of debt issued by the government or a company with a promise to pay a specified sum of money at a future date and carries interest at a fixed rate. Bond terms can range from a few months to 30 years. Bonds are tradable instruments and are generally considered a safer than stocks because bondholders are paid before stockholders if a company becomes bankrupt. Independent bond-rating agencies rate the likelihood that any given bond will default. Mutual Funds A mutual fund is generally a professionally managed pool of money from a group of investors. A mutual fund manager invests your funds in securities, including stocks and bonds, money market instruments or some combination of these, based upon the fund’s investment objectives. By investing in a mutual fund you can diversify, thereby, sharply reducing your risk. Most mutual funds charge fees. You often pay income tax on your profits. Annuities Annuities are contracts sold by an insurance company designed to provide payments to the holder at specified intervals, usually after retirement. Earnings cannot be withdrawn without penalty until a specified age and are taxed only at the time of withdrawal. Annuities are relatively safe, low-yielding investments. An annuity has a death benefit equivalent to the higher of the current value of the annuity or the amount the buyer has paid into it. Real Estate Buying a property is one of the most secure investments that you can make. As a famous quote puts it, "Buy land. They ain't makin' any more of it." Although humorous, this does succinctly say that there is only so much real estate out there and over time, the value of real estate generally increases. Real estate is a long term investment and primarily, one's home is the most significant piece of real estate that one will invest in. The returns can be enormous if you buy at a good price and sell at a higher price, but like any other investment, buying real estate can also turn around the other way and you can lose quite a bit. The real estate market generally fluctuates with the economy. In a strong economy, prices of real estate are higher and in a weaker economy, lower. An additional, or rental property can provide additional income and many income tax benefits. But, having rental property also means dealing with tenants and possible issues of property ownership in addition to owning your residence. Property investment varies widely depending upon the area of the world, or country that you live in. For example, buying a home in Fort McMurray will cost much more than buying a home in Lethbridge. TFSA - Tax Free Savings Account This type of savings account can offer a higher rate of interest. The "account" can be a regular bank account, GIC, or other form of government approved investment. You can invest up to $10000/year tax free. This is an initiative that was started for the 2015 tax year in Canada. Other types of Investments: You are not limited to investing in the above types of investment. You can invest in small business or a piece of a company or you can have a share in a friend's venture. Whatever money you invest, if it is not CDIC insured, make sure that you are prepared to lose that amount of money. If a deal comes along that is "Too Good to Be True" then it is. Walk away. Always check to make sure the company that you’re investing in is legitimate.
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