Financial investments do not have to be complex or complicated, as they sound. There are two basic things one needs to know if they would want to invest and that is preparing before you invest and learning the basics about how to invest in the right financial instruments and taking the right investment calls.
Read more as we talk about some key tips towards making sound investments. This can help you make a better plan of action towards your savings, and invest in better options.
Prep Before You Invest
The key is to know what you want from your financial investments, before you actually start making those investments.
It’s important to know what you want to accomplish with your investments before you begin to invest. For example, you might want to purchase a home, fund a child’s college education or build an adequate retirement nest egg. If you set financial goals at the onset—you are more likely to reach them.
The next thing is to get a handle on basic finances such as how much money is coming in and going out. This will help you control spending and manage debt. Most importantly, it will help you methodically save and invest, which is essential to building your net worth.
Use the information below to help you establish and meet your financial goals. One can easily create a list of their financial goals by working on your own or by working with an investment professional. Start off with the following:
Know Your Net Worth:
]You can figure out how much you have (or don’t have) to invest by calculating your net worth and the difference between your assets and liabilities. List down your savings which may include money in bank, property, investments, insurance amounts, and any other assets that you may have and after that prepare a list of all the liabilities that you have which may include your outstanding, bank loans, credit card debts, any amounts that you owe to other people, and other amounts that you may have to pay like unpaid taxes or other loans.
The difference between your assets and liabilities is your real net worth.
Calculate Cash Flow:
A positive cash flow—net income that exceeds expenses—gives you room to save and invest. List down your sources of income and the amounts you receive every month. The next step is to list down all your actual and potential expenses that you have to incur every month. If you list down a whole year’s worth, you will have estimated cash flows (income minus expenses), for each month, and remaining amounts at the end of the year. You can use a simple cash flow statement template from Microsoft for this purpose as well.
Manage Your Debt:
Paying down your debt is one of the best ways to increase your positive cash flow and save money that you then can invest. If you have any outstanding loans and credit card debts, then the first step is to reduce these debts. Debts can eat away at your investments and savings, and can negatively impact the amounts you may have to pay towards your credit card bills. So, look to reduce your debt before you start with your investment decisions.
Build an Emergency Fund: It is wise to set aside some money. An emergency fund is to cover any unexpected expenses like car repairs and medical emergencies. The fact is that if you invest all of your funds, it would be difficult to cater to an emergency when you don’t have the cash to pay for such an emergency. As a thumb rule, three to six months worth of savings is enough to tide by the roughest of times unless the market is going through a serious downturn.
Learn How to Invest
Investment decisions lie primarily in your financial goals. If you have a financial goal in mind, your investment plans fall into place according to it. Also, the earlier you start with investment, the easier it is to take risks, earn better returns, and stay in the market even if the market faces a downturn. For example, when the stock market took a hit in 2008, a large number of small time investors took their investments out from the market. This made the crash take a nose dive, and it continued to worsen. If you had the capacity to stay in the market for long, for example, nine years, today, you would have been a millionaire several times over! Check the five-year summary and see for yourself!
There are tons of investment options to choose from. Check out some investment options that we have defined for you. Think of the various types of investments as tools that can help you achieve your financial goals. Each broad investment type—from bank products to stocks and bonds—has its own general set of features, risk factors and ways in which they can be used by investors.
· Savings in Banks
Banks are a safe investment option where you can put in your money in a savings account or a savings certificate and earn a minimal return on the funds. The downside of saving in a bank is that the returns are generally lower than almost all other investment options.
· National Savings Schemes
National and Defense saving schemes by the government are a great, risk free investment option that you can choose from. You can choose from various different schemes that have returns ranging from 3.95% to 9.36% per annum. Since they are offered by the government, they are virtually risk free, but the downside is a lower end rate of return in comparison to other investment options.
When you buy shares of a company’s stock, you own a piece of that company. Stocks come in a wide variety, and they often are described based the company’s size, type, performance during market cycles and potential for short- and long-term growth. You can look through the stock market returns to evaluate returns on different stocks before you start making investments. You can also go through the broker route by signing up with a brokerage. They usually share their stock market tips and research with their clients, that can help you make relevant investment decisions.
Mutual Funds pool money from many investors and invest it according to a specific investment strategy. Funds can offer diversification, professional management and a wide variety of investment strategies and styles. But not all funds are the same. You have a wide variety of close and open-ended funds to choose from, different types of funds to choose from, the ones that invest fully in debt instruments, or only in stocks; others that invest in a combination of these options, or only in Islamic instruments, and yet others that have a component of gold as well. Each mutual fund type offers varying rates of return and have different risk profiles based on the combination of investment instruments chosen.
· Retirement and Pension Schemes
Different banks and other financial institutions also offer retirement and pension schemes. These schemes again have varying risk and return profiles, and not much different than investing in a savings certificate in a bank. However, their structure is similar to what you have in a mutual fund. The pool of funds is invested in a combination of investment instruments and you receive a lump sum benefit at the end of the scheme’s number of years. Look through some options in UBL, SCB and HBL for choices.
Insurance products come in various forms, such as health insurance, life insurance, etc. You can choose from several options in terms of investments, where you can decide on the number of years for the insurance plan, and the type of return you’re looking for. Based on that, your monthly or yearly premium is decided. At the end of the tenure, you get to cash in on the insurance benefit.
Tips for Sound Financial Investment
- Review your goals
It is important to think of your goal which should be aligned with your vision. Visualize what exactly you are looking for from your investments. Review them quite often to measure your success rate.
- Time frame of your investment
The time frame of investments is vital. Let’s say if you have invested in shares. The value of shares fluctuates in the market with respect to the time and the return on it will risk until you get a profitable margin. You will keep your shares with yourself until you do not get the desired value out of it. During this time frame, you will not have the funds available to begin with the rolling process. Therefore, you are going to use cash to invest on other opportunities. So, keep enough cash available with you while your funds are blocked in a share investment.
- Make an investment plan
Make a plan to differentiate between various opportunities. A rule of thumb says to start with low-risk investments. Once you are tailored to handle risk parts, you go for middle risk investments. Once you have build pace then go for high-risk investment. The more-high your risk factor, the more are the chances to lose your money. But also, a basic principle applies, higher the risk, higher the chance of returns.
- Broaden your horizons
To improve the chances of returns, spread your money across various investment types and sectors. Your risk in this way will be moderate. Diversification can help you to avoid burying your funds in a single investment option that may have a chance of going down the drain.
- Avoid High-risk investment
Only consider higher risk products once you’ve built up money in low and medium-risk investments. Do not jump into it at very early stage.
- Review Periodically
If you want to have hands-on and enjoy making investment decisions, you might want to consider buying individual shares – but make sure you understand the risks. Then review your investments occasionally to calculate return on investment as well as cost of investment, to measure whether you are on the right track or not.
Make sure you invest in an option which gives you good returns but do not get side-tracked by high risk options if you do not have the capacity at this point to invest in them. You may even consult financial advisors to help you to understand the investment opportunities and at appropriate timings. Or you can use tools like our comparison calculators to find out what are the best options to choose from, with respect to insurance, credit cards, loans and more!