Why do I need to Invest?
What will be discussed:
According to Economics, an investment is the purchase of goods that are not consumed today but are used in the future to create wealth. In Finance, an investment is a monetary asset purchased with the idea that the asset will provide income in the future or appreciate and be sold at a higher price.
It's actually pretty simple: investing means putting your money to work for you or just money earning money.
It is important to invest your money, whether in Time Deposits, stocks or bonds, because it can grow your money over a period of time. If you keep it in your checking account or a low interest bearing savings account, you're not getting your money to work for you.
Obviously, everybody wants more money. It's pretty easy to understand that people invest because they want to increase their personal freedom, sense of security and ability to afford the things they want in life.
However, investing is becoming more of a necessity. The days when everyone worked the same job for 30 years and then retired to a nice fat pension are gone. For average people, investing is not so much a helpful tool as the only way they can retire and maintain their present lifestyle.
A few people may stumble into financial security. But for most people, the only way to attain financial security is to save and invest over a long period of time. You just need to have your money work for you. That’s investing.
There are two ways your money can work for you:
· Your money earns money
Someone pays you to use your money for a period of time. You then get your money back plus “interest.” Or, if you buy stock in a company that pays “dividends” to shareholders, the company pays you a portion of its earnings on a regular basis. Now your money is making an “income.”
· You buy something with your money that could increase in value
You become an owner of something that you hope increases in value over time. When you need your money back, you sell it, hoping someone else will pay you more for it.
All investments involve some degree of risk. If you intend to purchase securities such as stocks, bonds, or mutual funds, it's important that you understand before you invest that you could lose some or all of your money.
Unlike deposits at banks and credit unions, the money you invest in securities is not BSP insured. You could lose your principal, which is the amount you've invested. That’s true even if you purchase the securities through a bank.
The reward for taking on risk is the potential for a greater investment return. If you have a financial goal with a long-term horizon, you may make more money by carefully investing in higher-risk assets, such as stocks or bonds.
The same question is being asked when it comes to where to put your money. There are a lot of options for investment, but how would you know that what you choose is the right one for you.
There are 3 options you need to consider before going ahead and investing your money:
First, what is your investment objective?
Why are you investing your money? What do you plan to get out of it?
Second, is the Time Frame
How long will you keep the investment?
And Third, What is your risk tolerance
Are you financially and emotionally ready if ever your investment doesn’t take off? And how much are you willing to loose.
It is critical that you know all the answer to these things before you choose where to invest. There is no such thing as a “best investment”; all investments have their advantages and disadvantages, their own PROs and CONs. If you have identified these options then you can now choose where to invest your money.
Banks are the most popular choice of many. They are everywhere and this makes depositing your money in banks a convenient option. When you say “Bank” some would be referring to traditional bank products like savings accounts and time deposits. These bank products are among the most liquid investments you can make and they are the most secure compared to other investments.
However, the downsides of going through these bank products are the returns, they might be the safest investments but the yields are not that high. Given that it is a low risk, low return investment, having low returns, especially if below the inflation rate, will erode the value of your money in the long run.
Banks today offer other products besides the usual deposit products. You can invest in the instruments they offer like Unit Investment Trust Funds (UITF), mutual funds, bonds and insurance. Take time to know what your bank offers other than traditional deposit products.
Most Filipinos look more into properties for investments. Growing up we always hear our elders telling us that land was the best investment. However, saying that land is the best investment may be too uncertain. Real estate’s greatest attraction is that it is a tangible investment – you can use it unlike bank investments. Land usually appreciates in value giving you capital growth, or it can generate a steady flow of income through rentals and capital gains, when you decide to sell it.
There are times however when real estate investments do not appreciate or, in some cases, their appreciation does not meet your expectations. Also, there are recurring costs in property investments such as real estate tax, administrative or association dues and common are charges. When you sell a property, you will be shocked with the hefty capital gains tax on top of the broker’s fee.
When you sum up all the money you need to spend during the time you need are holding your real estate investment, you will realize that your gains are not as substantial as you thought it would be.
Another downside on real estate is the cost – you need to spend a huge sum to buy land. If you decide to borrow money to finance your real estate investment, the interest that you have to pay may just eat up the gains you will make. Buying real estate because you need to live in it is another story as it is not necessarily an investment.
Another word that Filipinos are used to, everyone wants to be their own boss, and why not? Businesses can potentially give you the highest returns (if you know how to run it well). A business that succeeds can make one a millionaire, a billionaire even. There are many success stories of people who started with little but are now well off because of their business. However, business endeavors are the riskiest among all these investment options, because of their volatile nature. There are more businesses that fail rather than succeed, which is not encouraging for the new comers in the business world. Putting up a business requires more than just capital – competence, passion, timing, market and lot of studying and research are needed when you are considering doing business.
There is so much attention to stocks today as more and more Filipinos are being enticed into investing in equities because of its great performance in the last two to three years. Many investors are very optimistic with our local stock market and may find experts predicting that our stock market will further go up in the coming year.
Investing in equities today is also more convenient. Even with only a small amount, you can buy stocks through brokers (and online) or through pooled funds such as mutual funds or UITFs (as mentioned above). Although, as a known fact (contradicting the risks of bank products) the higher the return, the higher the risk. While it is true that the stock market has been giving extremely good returns lately, there were also times when investors lost a lot of money.
The stock market is not as predictable as people think it is and all the gains over the last three years can also be wiped out in a short period of time. More so, investing in the stock market, especially when you plan to trade, require a lot of competency and time. If you don’t have the competency and the time to trade, you should think of another option.
Whichever Investments you choose:
Think well and deep about your decision on where you want to put your money. Not all investments are the best one for you, but once you have weighed out what you want and what you can handle, then there would be less room for errors and disappointments. Always keep in mind to learn about your decisions, it is the best way to minimize risks.
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