When we were young, all we were taught about financial literacy was to save, save and save but as we grew up, the lesson changed from save, save and save to invest, invest and invest.
What really is the goal to financial stability? To save or to Invest?
For every income received, you do two things; you either save or you consume, in other words, you either spend or you save – economic theory confirms this. Economic theory also went on to explain that your savings equates your investment. The goal to financial stability isn’t really to save but to invest. However, if you don’t save, you cannot invest. Basically, you have to develop the culture of saving to invest.
Investment simply means putting your money to work to bring in returns. Investopedia defines it as a monetary asset purchased with the idea that the asset will provide income in the future or will later be sold at a higher price for a profit. In a simpler term, investment means putting some amount of money into a profitable business while expecting a return in advance.
There are a variety of different types of investments available today – there are short-term investments, long-term investments. A short-term investment is an investment with a time frame of about 3-5 years. Examples of short-term investments include money market funds, certificates of deposit, and short-term bonds while a long-term investment usually offers a higher probability of maximizing your return over a long term say, 10-year period for example government bonds, stocks e.t.c. in a more general term, Common forms of investment include financial markets (e.g. stocks and bonds), credit (e.g. loans or bonds), assets (e.g. commodities or artwork), and real estate.
There are various misconceptions about investment as many sees it as fraud considering the various investment scams (ponzi schemes) on social media.
There are some basic steps we need to understand about the concept of investing.
1. Do not Save, invest instead- just like I said earlier, the key to financial stability is not having a high savings (savings are great especially for precautionary measures) but the key really is to invest. Imagine receiving a steady income in form of dividends, or coupon payments for investing in a financial instrument while your principal remains constant; you are receiving an extra income.
2. Invest in What You Know – one main reason a lot of people put their money into investment only to discover it is a scam is because they don’t know what they are investing in. Invest in what you understand, and if you don’t know about it, seek clarifications from analysts
3. Do Your Research – Before venturing into any investment, understand the business you are investing into. What form of business is it? Check the business financial statement, how profitable is the business? Check past history or news about the business. Understand the trends of sales and revenue and many other things that’d guide you.
4. Have a financial advisor – investment have been made easier these days, you can safely invest with most platforms like cowrywise, investnow, kolobox and the rest. However, in terms of being a shareholder, a bond holder, you need a financial advisor. Speak to someone about it so as to prevent loss and to receive clarifications about the instrument you are to invest in
5. Ponzi schemes are all around and here are some tips you should know to detect
– When the investment promises you a high return with less risk
– When there is a pressure to invest immediately
– When the investment platform or plan has no legal backing
– When it cannot be traced to any company in a profitable business
While this serves as an introduction to the series; watch out for the next post on Investing Wisely