Investing in the Future
Investing in the Future
One of the most important aspects of modern life is planning the financial future. It’s not a secret that every successful task in our life needs planning, whether it is planning a holiday or planning some long-term event. However, the most significant of all things is personal financial planning as it secures good future life for people involved in this process. Planning the financial life a person should be serious and responsible and should examine many aspects which influence the process of financial planning at all. The finances should be balanced taking into consideration both short- and long-term targets.
The major step in personal financial planning is to form a monthly budget that will consist of expenses (or current capital), monetary (savings) and investment funds (Importance, 2009). A fixed budget contributes greatly to the future success as it helps to keep to the personal financial plan. Moreover, in some weeks or months it may show whether the budget needs to be improved or changed in accordance with the individual situation. Additionally, the budget can prevent people going into debt and help while savings planning (for instance, for a new home or college for children).
The current capital or expenses are money spent on new shoes, movie tickets, rent, phone, petrol and so on. The danger is that the list has no end. Therefore it is important to keep current expenses under control and to determine the border that separates really necessary expenses and unnecessary ones. Since the current capital may become necessary at any time, the basic requirement for it is its liquidity.
Current expenditure expenses may be quickly exhausted. However, people must worry not only about today. People’s health and strength are limited, so they must be prepared for unpleasant surprises, for example, for the dismissal or disability. Savings are that part of the budget that provides financial protection.
Savings should protect people from various risks. Consequently, it must include savings to live on, insurance (of life and health) and the necessary planned savings required for future expenses: children's education and future pension allowance. The main requirement for assets belonging to the savings is their reliability.
Having only one source of income, whether wages or own business, any person runs the risk of losing it at any time. The realization of this leads people to think about additional sources of income. It may be an investment in financial assets (banking products and securities) or in real assets (real estate, private business, etc.) - in other words, the investment capital. Income from investments will help to replenish the current and capital reserves, as well as serve as a source for financing new investment ideas.
The main objective of investment capital is its profitability. People consciously take on a higher level of risk compared to savings. Realizing that the value of assets may be affected by the short-term fluctuations, people need to plan investments for the long term period. It means that investments have the lowest liquidity compared to savings and expenses.
It is clear that people cannot foresee all risks, but the minimum reserve is very required. This reserve will support people and alternative sources of income will allow being less dependent on the success of the private business and salary.
Model of three types of capital allows to structure assets in such a way to find an optimal balance of safety, liquidity and profitability. A greater choice of tools is available nowadays, but the sense of personal wealth management has remained the same.
- A financial plan is never too late to do. If a person has his income, he should start planning regardless of the size of the income.
- It is necessary to consider each asset in its three dimensions: liquidity, safety and profitability and define personal priorities.
- It is also crucial to separate personal capital into three components: the current capital - expenses, monetary funds or savings, and investments as an additional source of income. Each type of capital has its priority: current capital (expenses) must be liquid, savings - reliable and investments - profitable.
- To achieve the success it’s necessary to have a large sum of money. Investments may be not only financial; they also include personal time, knowledge and energy, which may turn into revenue in the nearest future.
In order to make the conscious choice of assets, it is necessary to know the threats that may occur:
1. Personal greed, which is makes people forget about savings and additional sources of income (investments).
2. Time that changes the assets value.
Stocks, Bonds, Mutual Funds
There are many different ways of how to save money efficiently, however each of them has its risks and advantages. To plan a successful retirement strategy it would be effective to save money in stocks, bonds and mutual funds (The importance of planning for retirement, 2013).
Stocks: Investing in stocks is a very old type of investment. It's quite attractive investments, as having money a person can buy some stocks that have great potential for development in the future and earn dividends. Moreover, if the person wants to take back his money, he can sell the shares at a higher price. Typically investments made in the companies that are actively developing and have a high potential in the future are rather profitable. Among such companies are those producing computers and other digital equipment or involved in the development of alternative sources of energy. These companies are actively growing now and probably will also increase in the future.
However, as any investment investing in stocks involves risks as a person cannot foresee how the company will develop in future, what percentage of income will be paid, and so on. Unfortunately long-term investing in stocks requires a very deep knowledge and a fairly large capital.
Thus, the major attributes of stocks that should be taken into account are the following:
- Investing in stocks requires deep knowledge of the total process and the companies in which it would be profitable to invest.
- Stocks have great potential for investors and are very profitable.
- Along with high profitability stocks are extremely risky.
Bonds: The next way of effective money investing is the bonds of various successful companies. The main feature of this investment is a fixed interest that is paid back at a set date in the future. Bonds, like loans, have the interest paid at regular intervals and does not depend on how much profit (or loss) the company has received. If businesses are liquidated, the owners of their bonds have the paramount right to dispose the assets and profits remaining after the liquidation of the company.
Investing in bonds involves making a profit in strictly defined terms written in the contract. Consequently, bonds are not as profitable as stocks which can provide the additional income until the company exists. The main objective of the bonds is to provide funding of some project. In order to attract investors, many companies issue new additional bonds. A person investing in such bonds gets more flexible tool to maneuver between the two markets and can earn more.
Hence, the major features of bonds are:
- Bonds have a fixed interest rate that is paid back at the set period of time.
- Bonds are less profitable than stocks.
- On the other hand, investing in bonds is much safer than investing in stocks.
Mutual funds: Mutual funds are the tool for a group of people investing in different stocks and bonds. They form the so-called “mutual” group; hire a fund manager who decides how and where to make the effective investments basing on the targets set in front of him by the mutual group. The share value depends here upon the value of bonds and stocks in the fund.
In contrast to stocks, mutual funds may provide simultaneous access to several companies providing security that stocks don’t have.
There exist many mutual funds that serve different retirement needs. They attract lots of people as almost everyone can take advantage of this investment type having from $30 to $500 to begin with.
Mutual funds, accordingly, are characterized by the next issues:
- Mutual funds include both stocks and bonds.
- Mutual funds are attractive to almost each person.
- Mutual funds are the most secure and profitable. They guarantee the highest gain.
Actually, it’s extremely difficult to answer which of three ways of investing are the safest. Mutual funds managed by professionals are very secure, while bonds are not less reliable while the company operates. Actually, the best choice among stocks, bonds and mutual funds fully depends on a personal investment plan, its major issues and targets. Stocks are the riskiest among the others investing ways, however, they are the most profitable. Bonds, in their turn, are safer, constant, but bring less gain. Both safety and profitability of mutual funds depend purely on perspicacity of the fund manager and its ability to foresee the prosperous companies.
According to the things discussed, mutual funds are the best choice for those planning comfortable retirement strategy. First of all, mutual funds are rather safe. Secondly, they can bring high gain and suit well almost each person because most of them don’t know how to invest in stocks or bonds effectively and don’t have large initial capital. Investing in mutual funds even a small amount of money, people may get sizable reward over some long period, especially if to make additional investments on the regular base.
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