Updated: June 8, 2012
Where can I invest my P20,000?
This is a question I often see in business and investing forums everywhere, although of course, the amount varies.
After the first post, I’d often read invites from other forum members to join him or her in various affiliate programs and multi-level marketing companies.
At other times, the answers would be business ideas which are currently doing good and sometimes, the replies are vague references to mutual funds, unit investment trust funds (UITFs), forex trading, e-gold and the stock market.
After a couple of weeks, the thread starter stops posting and the discussion ends without feedback regarding where the money was finally invested.
Whenever this happens, I’d imagine a simple employee who received a salary bonus or an unexpected windfall and was too lazy to do personal research on investment opportunities. That’s why he decides to ask online forums where he can invest.
A few days after, he’d experience information overload and succumb to laziness. Finally, he’d decide to just buy a new cellphone, a new car or whatever luxury he can afford.
Is the story familiar to you? Has this already happened to you or someone you know?
The next time you find yourself with some extra cash that you may want to invest, I suggest you follow these simple tips. It’s my personal step-by-step guide to investing in anything and everything.
Ask yourself these questions and not only discover the right investment for your money but more importantly, help increase your financial literacy.
Step 1: Do you already have an emergency fund?
Before you start investing your money, you have to first assess your current financial situation. Track and anticipate your expenses and save up for an emergency fund. Three to six months worth of your monthly expenses is recommended.
Once you have an emergency fund, you become more confident in taking investment risks.
Step 2: Why do you want to invest?
The main reason you want to invest is to make your money grow. Unfortunately, this reason is not enough. You should have more specific objectives. Are you saving up for retirement? Do you simply want extra income?
Knowing how you are planning to use the profits from your investments helps in determining the best investment product for you.
For example, if you want to prepare for the college education of your children, instead of investing in a business franchise, you may consider getting an education insurance instead.
If you’re simply preparing for a special occasion such as your wedding next year or a vacation out of the country in four months, then it’s wiser to put your money in short-term, low-risk investments such as treasury bills.
If you have several objectives, list them down and assign their importance to you.
Step 3: How much money are you planning to invest?
Determine your investing budget. Knowing exactly how much money you have provides a better perspective on the investment opportunities you can afford.
Furthermore, decide if you will be rolling over your returns into the investment. This means that whatever income you receive, will it be reinvested back into that investment? If so, then consider putting your money in assets that easily compound as the principal value of the investment increases.
Lastly, remember to put out as much as you can afford, specially if you’re going into high risk investing such as currency trading. And more importantly, stay within that limit.
Step 4: How long is your holding period and how much risk can you take?
Investments take time before they return income. Furthermore, different assets increase and decrease in value at different rates. This is the reason why I asked for your primary objectives in step 2. Knowing your personal goals helps in determining the length of time and the level of risk you can take in your investments.
Keep in mind that long-term investments generally give low to moderate returns for less risk, while you have greater chances of losing your money in short-term investments with high yield. If you opt to invest conservatively, be sure that the modest rate of return you’ll receive is acceptable to you.
More importantly, determine if the profits will be high enough to cover for inflation. Finally, whatever length of time and level of risk you decide to take, be certain that under the worst case scenario, your financial stability will not be affected.
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A Beginner’s Guide To Investing In Anything and Everything, Part 2