You may be like other individuals who wish to increase the amount of money they have saved. You’ve probably also heard the term “Investing,” which is frequently used by insurance agents. Often, individuals misunderstand what it means. What is investing exactly?
Investing is the process of putting your money to work for it to grow – which is the primary reason you do it. You can invest in another person’s business or start your own—and you are not required to work for it to succeed.
As you may recall, I was perplexed about the distinctions between business, investing, insurance, and saving. These concepts are so dissimilar that we must thoroughly comprehend them to know what to do and avoid wasting our money and time. Continue reading this article to learn how I will adequately present the concept of investing.
What Is Investing, How Does It Work, and How Does It Pay Off?
When you invest, you put the money you have—whether it comes from inheritance or money you earn or borrow from other people—to work on something or activity that will help you grow your money. This object or activity is a business or business, which is either owned by another individual or by you.
You may believe that business is similar to a machine that generates money. This engine requires fuel to operate. This fuel is money or investment in the industry. This money may come from the business owner’s pocket or the pocket of another individual, such as you. The funds raised will be used to operate the business and increase its revenue. This is where investors—the people who allocate money—make money.
You are not required to work in the business in which you invest as an investor. You may believe that your money is working for you to earn additional funds. “It’s money working for you,” they claim.
This is what distinguishes an investor from an employee or self-employed person. The employee must work for a company to be paid every month. Self-employed individuals, like freelancers, must continue to work (for their clients) to earn money. We discussed this in another article.
On the other hand, entrepreneurs can work in their businesses—but they do so as self-employed individuals. The company should be autonomous and capable of operating independently of him. All it requires is an investment and additional staff—not the owner.
Entrepreneurs can invest in their businesses. This is advantageous because he is not required to borrow money from others. When he seeks outside investment, he reduces his ownership of the company. Whoever invests will receive a portion of the business, depending on the amount invested.
As a partial owner, an investor will receive a share of the business’s profits. This is where individuals earn money through investment.
However, because the business is based on investment, there are risks associated with it:
- Losing all of your money
- Not earning your money
- Not recovering your money in full
Why You Should Invest Or Desire To Invest?
Our primary objective is to enter it for most of us—to increase the money we already have. We earn money when we work or conduct business. And we save for the sake of saving. While we work, we are simply saving in the piggy bank or bank account. We don’t want it due to so-called inflation.
Investing – The Antidote to Inflation
Our money’s value depreciates over time due to inflation. This means that our money’s purchasing power diminishes. At the moment, 100 pesos can purchase two kilos of rice; however, 100 pesos may only be able to buy one kilo in a few years.
Assume that the Philippines’ average annual inflation rate is 5%. This means that to preserve the value of the money you save, you must invest it in a vehicle that earns a minimum of 5% per year.
In another article, we discussed what inflation is and how it affects your savings.
Investing to Increase the Value of Your Money
Additionally, you want your money to grow as it grows. Nothing beats the satisfaction of knowing that your money is growing without you having to work. If you rely solely on your time and ability to earn money, you will only run into difficulty if you cannot work (or in retirement). And it is not only in these instances that you will require money. Additionally, there are significant expenses that you must prepare for – a college fund for your child, purchasing a house and land, establishing a business, and much more.
Therefore, you must increase your savings immediately while you retain the ability to work, as you will require it when the day arrives.
What Types of Investments Are Available?
There are numerous investment options available. Several of them are listed below. I am unable to fully explain each of them because a single section of an article is insufficient. I’m going to write an essay about each of them.
1. Rental Properties
You can rent out the real estate property you recently purchased. This way, you will receive money each month. Once you’ve repaid the total cost of acquiring and developing the property, you’ll be able to earn money here.
2. Investing in Stocks
When a private company requires investment (or capital) to expand, it issues stock. A person or company that purchases it will acquire a portion of the company and be entitled to a share of its profits.
3. Government Securities
When the Philippine government requires additional funds, it will sell “bonds” that individuals or businesses can purchase. Frequently, the government will return the original amount plus interest. Bonds have an expiration date. Occasionally, a year, five years, or even ten years.
It’s similar to government bonds, except that you lend to individuals (or even businesses) in need of money. Depending on the terms of the agreement, they will repay the debt in full, including interest.
5. Mutual Funds
A mutual fund is a collection of money that a group of people invests. This money will be held by a company that will support it in various stocks of publicly traded companies or government bonds. When these stocks and bonds perform well, the performance of a mutual fund is reflected.
According to a study conducted in Europe in 2020, mutual funds are becoming increasingly attractive as an investment vehicle in the modern era, and they are increasing. This demonstrates a great deal about the public’s confidence in this investment vehicle.
6. Variable Universal Life Insurance
VUL is the new term for the new class of life insurance (or variable universal life insurance). This is a multi-asset class investment. Along with the standard coverage you (or your family) receive in the event of an accident. You also have access to an investment fund that grows over time.
What You Should Understand About Investing
Let’s discuss some of the details you should be aware of as someone considering entering.
It’s Beneficial To Have a Basic Knowledge of Business Before Entering the Investing World
Before investing, it is preferable to gain entrepreneurial experience first, as this is the only way to understand a good business with positive cash flow truly. Additionally, you will understand how to operate it properly. You will gain an understanding of the issues that companies face and how to resolve them.
From here, you’ll be able to identify other people’s businesses and decide which ones to invest in. And, of course, you decide which of them is profitable and which is not.
It Requires Time Investment To Grow
Additionally, time is critical. The majority of investments require time to mature. Profits quickly are not actual, particularly in this case. Regardless of the asset class—real estate, stocks, mutual funds, mining, or precious metals—they all require time and the labor of others to produce valuable products or services that they can sell at a higher price—cost concerning the total cost of labor and materials used to manufacture them.
If a “stock trader” successfully raises money in a short period, he is almost certainly defrauding another party. And, if he did it legally, he engaged in “speculation” rather than investing.
Investing Is Not A Game Of Chance Or Greed
Investing and speculation are not synonymous. With your education, you expect your money to grow because you understand the factors that will determine your success. Additionally, you are aware that it takes time for your money to grow.
In speculation, you wish for your money to grow at a more significant rate than the expected return rate on cash and frequently in a short period. You have no reason to believe that what you have done will be successful. This is identical to casino gambling.
Others do this to make a quick profit. Its failure probability is extremely high. Yes, even in investment, there is no guarantee that you will receive your money back or grow, but you do it because you have done your homework on what you are investing in. In speculation, a person’s greediness or greed prevails, such that he is unconcerned about the risk associated with what he enters.
Saving Is Not the Same As Investing
You will read numerous articles claiming that saving is a form of investing. Even educating oneself about personal finance is considered a form of self-investment. The term “investing” in these sentences is a misnomer.
In the true sense of investing, capital is required to expand a business. Yes, you need money—perhaps from your savings—to invest—but redemption is not investing.
The same is valid for self-development, which requires actual study and time, and effort. It will not result in an immediate increase in the value of your money.
This is critical because many people believe they must purchase all of a personal finance guru’s books. After all, what they are doing in investing. The truly wealthy are not these individuals but the “guru” who sells his books.
Which Investment Is the Best?
It’s prudent to enter the investment when it addresses your concerns about growing your money:
- The amount of investment required.
- The risk that you will lose your investment.
- The time needed for your investment to return.
- The potential earnings.