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“I want to do that thing rich people do where they turn money into more money,” says Liz Lemon (played by Tina Fey) to her boss Jack Donaghy (played by Alec Baldwin) in the popular US sit-com 30 Rock.
And although the line – like Tina Fey’s character – is fictional, it could very well apply to at least some people reading this column. After all there are those that share Liz’s belief that using money to make money is not for everybody.
However, I beg to differ – turning ‘money into more money’ is not the domain of the rich. Instead – with a little forethought and financial planning it can be for everybody.
After all even though our individual financial requirements may differ most of us do have similar hopes and ambitions as well as children’s schooling and retirement to consider – and they all cost money.
Simply put there are two ways to pay for our financial responsibilities and wants. One is by saving and the other is by investing.
While saving is putting money aside to pay for something at a later date, investing is the act of using your money to make more money. And while saving is normally used to achieve short-term financial goals investing usually means taking a longer term view.
So why should we invest instead of save? The most common reason is to beat inflation because the interest rates offered by banks are often not adequate to stave off the persistent perils of inflation. In addition investing will often allow us to achieve more growth faster. However, one must also realise that investing is not without its risk – as well as its reward.
According to the Merriam-Webster online dictionary the definition of the word investment is “the outlay of money usually for income or profit”. Roughly translated that means turning “money into more money”.
The most common ways to do this are by investing in stocks, mutual funds and bonds. Other such investments can involve properties and commodities such as gold and copper for instance. Each type of investment often has its own risk and reward – and pros and cons.
Perhaps the most common form of investment nowadays is in stocks and the stock market. It has been made easy and accessible through online brokerages and accounts. In addition information is readily available through the mediums of TV and the internet.
When you buy a stock you are actually buying a share in a company. The value of that stock (or share) is determined by the success of that company. Normally if the company does well the share price increases (although this might not always be the case – there may well be other factors involved).
While stocks are expected to give you a higher return than the interest available on most savings accounts there are risks associated with this type of investment. The share price could go down as well as up and the company itself could even go bankrupt rendering the stock worthless. However, in most cases if you invest using a long term view (eg 10 years) and proper strategies the risk is minimized.
Another increasingly common type of investment involve bonds. A bond is effectively an agreement which involves a loan between the purchaser of the bond and the issuer.
When you buy a bond you are effectively lending the issuer money. In return for the loan you will receive interest payments on your outlay. The length of the term and the interest rate is determined when the bond is issued.
Bonds can be issued for as little as one year or as much as 30 years. During this term the issuer pays the bondholder interest. Upon maturity the issuer has to pay the bondholder the face value of the bond. Bonds are normally issued by governments, government agencies and corporations.
Another type of investment that has gained in popularity over the years is that of the mutual fund. Much like trading stocks and shares mutual funds have become much more accessible and easy to invest in.
The essence of mutual funds is that investors are able to pool their own investments with others. This can allow for increased buying power and bigger profits. In addition the fund is often managed – which takes away the need to persistently monitor the investment as one would with individual stocks.
In today’s investment world there are many types of fund to choose from. Many funds are extremely diversified with holdings in stocks, bonds and cash. Each fund has its own investment objective and some specialise in different aspects of the market such as property or commodities etc. Funds are a good way for a beginner to enter the world of investing.
So, if you want “to do that thing rich people do” and make the most of your money to achieve your financial goals then rest assured it is possible. However, my recommendation to you (an Liz Lemon) is to obtain professional financial advice.
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