Contributed article in our business series. Enjoy! – Kimberly
The key word in life when talking about our financial state is investment. Simply put everyone should and could do it. A lot of people can make a lot of money from this very broad activity. The most common problem we encounter is the false presupposition that investing is impossible for the inexperienced beginner. Those kinds of concerns, especially in today’s abundance of information and investment opportunities, are unfounded. Anyone can understand the basics and move on from there. The trick is to get started as soon as possible. With whatever we currently can. In this article, we will go over the basic principles that go into all financial endeavors.
1. Knowing the Terminology
We do not need much to get started on our own investment journey, but we do need to know all the necessary terms. So, let’s go over the most basic ones to make our life easier down the line.
- 401(k) are plans offered by companies to their employees as a form of help towards a retirement. The money we set aside is tax-deferred and is matched to some degree by the company itself. Which means that they will contribute to that pool as well. Retirement is a form of investment itself. How much we set aside is up to us. Increasingly so, putting all our eggs into the 401(k) basket is discouraged. Having a side-gig to see us through our more seasoned times is quickly becoming a necessity to live a comfortable life.
- APR stands for annual percentage rate. What it refers to is the interest we are paying on the money we have previously borrowed. Since investing can sometimes mean taking out calculated loans, it is important to pay attention to this factor. The higher the propositioned APR the more we will eventually have to pay back in total.
- Assets are items of value that we own. It can range from our car to other major savings, just to name a couple. It is used to calculate our net worth.
- Bonds can be construed as a loan that we are giving to an organization or an institution. Bonds are often used together with stocks but are quite different. Basically, the company involved in the contract will pay us back at a certain previously agreed upon time. A reverse loan if you will.
- Stocks are when we buy a small portion of a company. Like all things in a capitalistic economy, the value of each individual stock is determined by the willingness of people to buy it. Various variables go into that equation, like expected company growth and the dividends which are of most interest to us. Dividends are the rewards if you will, that we get on a regular, pre-determined basis. The general rule is to buy stocks in companies we believe in and have a prospective future.
- Credit score is a numerical representation that is based on various analyses of a person’s credit files. It is a way to represent creditworthiness that is most utilized when applying for a loan. In such a situation, accurate and comprehensive credit reporting is necessary.
2. Diversifying
If we are talking about growth and security from losing our invested capital, the old saying holds true. Do not put all your eggs in one basket. If we invest all our finances in one company, we might get better results because of the sheer volume. This is risky. Because on the other hand, what if that company goes bankrupt? We lose all that we have invested, that is what happens, no returns. But there is a better practice. Instead, we should aim to invest in as many different ways as possible. That way, if one of our plans fall through, there are other ones already in motion to back us up. Having a diverse investment portfolio is the most secure way to go.
3. Knowing Our Goals
One of the main questions we need to ask ourselves is what do we aim to accomplish? We could be saving up for retiring in comfort. Maybe we are accumulating money for some long-term goal such as a college education for our children or starting a business. Or maybe we have multiple different investment plans for different goals. In order to optimize our investment strategies, we need to look deep down and come up with an answer on why we are doing it. What is the end result and how do we achieve it? Objectives and goals do not exist in a vacuum. They are heavily influenced by multiple factors in our environment. We can never account for all of them, but that is one of the goals we should strive for. The more variables we tackle and incorporate into our equation the more complicated it is. But in return, we can be that more confident that we are doing the right thing.
4. Managing Risk
Risk, in the context of finances and investing, is constantly present. There is no such thing as a perfect risk-to-benefit ratio. What it means is we could lose money. Stocks can lose their value. A business idea might seem not as appealing to customers as we initially projected. An external factor like a weather disaster might affect our commitment in some way. There are plenty of expected or unforeseen situations that we can chuck up to a term called risk. The question is how much of a drop in value for our investments can we handle and stay afloat until the waters subside? Our financial plans should be in line with the time span we have at our disposal. A younger individual will usually take a smaller risk approach since time is on their side. In contrast, someone in their 60s will most likely take bigger risks, which also sometimes bring bigger rewards.
It is important for us to approach our financial strategies with as much research and knowledge as possible. We need to be aware of what we do not understand. Rushing into a business plan of any kind blindly just because someone had said so is always a bad route to take. Also, what might work for one, might not work the other, as no situation or person is the same. Investing is not a one size fits all kind of a solution. With this introduction, we have made the first steps necessary for us to start building a better future for ourselves and our loved ones.
Author: Lucas Parker – Lucas is a business consultant with a passion for writing. Doing his research, exploring and writing are his favorite things to do. Besides that, he loves playing his guitar, hiking and traveling.
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