You might have just started out in the world of work and might be considering how you could plan and build a life of your own. You might either want to skip the generational wealth that was handed down to you or decide to bask in it. Many schools of thought argue that you save about 10% of your income every month. Others recommend you save higher. The essence of saving is to beat the decline in the purchasing power of a given currency over time; inflation. That is where the principle of investments comes in. The word investment has become muddled with overuse. People are now encouraged to make investments in their education, their cars and their home. All of these things may make sound financial sense, but they are not, strictly speaking investments.
What then becomes the definition of investments? An investment is an asset or item acquired with the goal of generating income or appreciation. Appreciation refers to an increase in the value of an asset over time. An asset, in turn is an item of property owned by a person or company, regarded as having value and available to meet debts, commitments or legacies. When an individual purchases a good as an investment, the intent is not to consume the good but rather to use it in future to create wealth. An investment then has the hopes of a greater payoff in the future by concerning the outlay of some asset today which could include time, money and effort.
I clearly remember the startup of the food business of a friend; where she went around looking for someone to design her brochures and kept asking me for a befitting name for her business. This business now generates a substantial amount of income every month because she invested her skill, time and money in its startup. An acquaintance has put up a live band which hosts shows for money. You could also call that an investment. Musicians, artists and writers have something in common; they invest in an ability they have and call it talent. This has the propensity to generate income in future and increase his or her value. The act of investing has the goal of generating income and this includes bonds, stocks or real estate property among other examples.
Additionally, purchasing a property that can be used to produce goods can be considered an investment. I could literally say I have decided to invest in myself just because I intend to further my education, with the goal of increasing my knowledge and improving my skills. This has the hope of ultimately producing more income.
With the basic knowledge of investments, let’s zoom straight into the types of investments. Bear in mind, you do not need a huge amount of money to be an investor because you have a lot of options for where you could put your money. It is important to weigh the different types of investments carefully.
Investments are generally bucketed into three major categories
- Cash equivalents
There are many different types of investments within each bucket. It is essential to consider whether you would want to invest for the short term, medium term or long term.
A stock is an investment in a specific company. When you purchase a stock, you are buying a share. A share is a small piece of that company’s earning and assets. Companies sell shares of stock in their business to raise cash and investors in turn buy and sell these shares among themselves. When companies lose value or go out of business, it poses a huge risk to your investment hence this is considered a high risk investment. The higher the risk, the higher the returns! Heard of the term “Buy low and sell high?” Stock investors make money when the value of the stock they own goes up and they sell the stock for a profit.
A bond is a loan you make to a company or government. With this, you allow the bond issuer to borrow your money and pay you back with interest. Because bonds are considered less risky than stocks, they offer lower returns. Investors expect regular income payments because bonds are a fixed income investment. This interest is paid in regular installments typically once or twice and the total principal is paid off at the expected maturity date.
These are investments securities that are meant for short term investing; they have high credit quality and are highly liquid. Treasury bills which are low risk investments with a low return profile fall under this category. Having cash and cash equivalents in hand speaks a lot about a company’s health, as this reflects the firm’s ability to pay its short term debts.
Ownership is what comes to mind for most people when the word investment is mentioned. The money put into starting and running a business is an investment. Entrepreneurship is one of the toughest investments to make because it requires more than just money. By creating a product or service and selling it to people who want it, entrepreneurs can make huge personal fortunes.
In Ghana, real estate is a venture that you should consider investing in because either renting or buying a house is a basic need. Buying and owning real estate is an investment strategy that can be both satisfying and lucrative. Prospective real estate owners use leverage to buy a property by paying a portion of the total cost upfront, then paying off the balance, plus interest over time. One of the primary ways in which investors can make money in real estate is to become a landlord of a rental property. One of the cons is that tenants can potentially damage your property.
A regular savings account is the last investment package I would like to talk about. The investor is essentially lending money to the bank. The bank will pay interest to the account holder and will earn its profit by loaning out the rest of the money to businesses at a higher rate of interest. Keeping cash elsewhere that you don’t plan to spend in the immediate future is unsafe and thus having a savings account has a psychological benefit. A savings account however can be a means of setting aside funds to reach longer term goals.
It is important to understand investments are not for fable minds, only for the mature minds. Investments are synonymous to a game; you either lose or win. But as in every game, remember the general rule which states “You can’t win all rounds, all the time”
Never depend on a single income, make an investment to create a second source. – Warren Buffet