If you have decided that you don’t want to waste your income by spending it all, we congratulate you. This is a major step that many other people, unfortunately, fail to make. Deciding to save has put you head and shoulders above many of your friends, family, and neighbors. However, don’t let it get to your head. It is one thing to save money, it is another to do it right.
You see, saving money is just the first step. Sure, it took a lot of discipline and self-control to accumulate some cash but that is just your first step to sound financial stewardship. Saving is just the first stop in a long journey to financial freedom. You have to have an investment plan or else your savings are wasted. In other words, if you don’t have an investment plan, you are not saving at all.
Read the tips below to get a clear idea of the right investment plan for you.
Realize the threat inflation poses
Why do we say that the act of merely saving is the same as not saving at all? The truth is that if you just parked your money in the bank, your savings will eventually be worth nothing because inflation would have destroyed it. That’s right-your money is rotting, thanks to inflation. Every passing year, your money will buy less and less goods and services. That’s the threat inflation poses to your savings.
This is why it is important that you move your money into investments that, at the very least, keep pace with inflation and taxes. If you don’t do anything with your money, the effect would be like you didn’t save any money at all. Decide to invest your money. The sooner you realize this, the better for you.
Find the right risk profile
Every investment has a rate of return. This is the amount of profit you get back above and beyond the amount you invested. The iron rule of investments is simple: the higher the risk, the higher the return. So if you want your investment to return a lot of income, you need to assume a higher level of risk.
This is the reason why time deposit accounts at banks pay so little. Sure, you can yank out your money fairly quickly from these accounts. Sure, they are safe. But at returns that are less than 1%, these are money losers since they rate of return that is barely the same or barely below the rate of inflation.
On the other end of the investment spectrum are stocks. Some stocks can appreciate ten to thirty percent in a month. That is some serious return. However, the reason these stocks pack so much return is they are also very risky. Sure, you can get a thirty percent return on your investment but there is also a risk the stock will tank, and you end up losing, on paper at least, some of your investment capital. Pick the right mix of return and risk that you are comfortable with and stick with it.