Investment Basics
Have you ever wondered what the difference is between saving and investing?
Saving is setting money aside in cash accounts (generally bank savings or cash management accounts) for immediate expenses, emergencies and short-term plans. The money earns interest, which is added to your assessable income and taxed at your marginal rate.
Investing is putting money into assets to grow in value, deliver returns and build long-term wealth and security. There is a wide range of investments to choose from, each with different features and benefits. Your age and stage of life will affect the investments you choose.
In other words, saving is for now, investing is for the future. Both are necessary for effective financial management.
Every sucessful business has a budget as a way of monitoring cash flow. Think like a business. Have a budget to monitor what comes in and goes out. You can then be in control what you need to keep for the short term [spend now] and how much you need to invest [spend later].
How to choose investments
It's easy to choose a savings account, but far more complex to decide on your long-term investment strategy.
You will need to be clear on the differences between the four major asset classes - cash, bonds, property and shares - and between fund managers.
You will also need to understand the various risks and returns involved in investing and work out what level of risk you are comfortable with.
Risk and return
All investments aim to provide a certain level of return and are subject to certain risks. So when it comes to investing, as well as making money there's a chance you could lose it. Apart from losing money, you can also think of risk as the possibility that your investments don't achieve sufficient returns for you to meet your financial objectives.
One way to manage investment risk is to ensure you hold the investment for an appropriate length of time, generally five to seven years for share investments, to ride out any short-term fluctuations in value.
As a general rule, the bigger the potential investment return, the higher the investment risk, and the longer the suggested investment time frame.