Most people don’t know or have only a vague idea of the rate at which they are saving money. The amount you actually saved over the past year is equal to the change in your net worth over the past year. If you own house, ignore it in the calculations. And don’t include personal property and consumer goods such as your car, computer, clothing and so on with your assets.
Save at least 5 to 10 percent of your annual income for longer- term financial goals such as retirement. But if you are starting late, say at the age of 50 years or so, this amount may not be enough. You must save atleast 15 to 20 percent of your income and be sure to invest your savings properly to grow it further. In this way you can nullify the effect of Inflation and various state and federal government taxes.
Don’t Let Your Money Sit Idle : –
Money not invested properly loses its value with time due the adverse effect of Inflation. Let us assume a conservative 4 percent rate of annual inflation. The purchasing power of 100 dollars will be equal to just 50 dollars after 18 years. So, be sure that your savings are invested properly in various investment vehicles.
But before you select a specific investment, first determine your investment needs and goals. Why are you saving money- what are you going to use it for? Establishing objectives is important because the expected use of the money helps you determine how long to invest it. And ,that, in turn helps you determine which investments to choose. The risk level of your investments should also factor in your time frame and your comfort level. Investing in high- risk vehicles doesn’t make sense especially at this age of 50- 55 years.
Reduction In Purchasing Power Due To Inflation
Inflation Rate Reduction in purchasing power after 10 yrs
2 percent (-) 18 percent
4 percent (-) 32 percent
6 percent (-) 44 percent
8 percent (-) 54 percent
10 percent (-) 61 percent
Sizing Investment Risks : –
Before you invest, ask yourself these questions : –
— What am I saving and investing this money for? What’s my goal?
— What is my timeline for this investment? When will I use this money?
— What is the historical volatility of the investment I’m considering? Does that suit my comfort level and timeline for this investment ?
Prioritizing Your Savings Goals : –
By now, as I have repeatedly mentioned, most of you must have finalised your financial goals. Your financial goals, at this age, may include:-
— Owning Your Home
— Making major purchases like car, vacations, fancy furniture etc.
— Saving for Retirement life.
— College Education of Kids
— Owning your own small business.
Accomplishing such goals almost always requires money. A Chinese proverb says “ Do not wait until you are thirsty to dig well”. So don’t wait any further, as it may already be late.
Diversifying Your Investments : –
Some of the investment vehicles which are available for investments are as follows : –
1 C.Ds and Bonds : – This meets your emergent requirement of funds. These are also suitable for conservative investors.
2 Mutual Funds : – These can be Equity, hybrid or balanced funds. In addition Index funds can also be considered. But the investment horizon should be long, say 3 to 5 years.
3 Immovable Property or Real Estate : – When the amount is sufficiently large and the requirement is not urgent.
4 Equities or Stocks : – This option, although quite volatile, is available for the investors who can take or withstand higher risk.
But, to decrease the chances of all your investments getting clobbered, you must put your money in different types of investments, i.e. Diversify your investments , such as Bonds, Stocks, Real estate and small business. In diversification, although your returns are not completely co-related. It will ensure that when some of your investments are down in value, odds are that others may be up in value. For example, when real estate is down, chances are that stocks may improve in returns.
— Diversification reduces the volatility in the value of your whole portfolio.
— Diversification allows you to obtain a higher rate of return for a given level of risk.
Understanding Your Investment Choices : –
Your investment depends on where you’re hoping to go, how fast you want to get there and what risks you’re willing to take. It is suggested that: –
–-Slow and Steady Investments : – Everyone should have some money in stable, safe investment vehicles, including money that you’ve earmarked for your short- term goals, both expected and unexpected. For this purpose , Transaction/ Checking accounts are best option. Investment in bonds and certificate of deposit(C.D.) can be considered.
— Building Wealth With Ownership Vehicles : – Investment can be made in Stocks, Real estate and Small business. These investments ,historically, has given better returns, may be 10 to 15 percent but, the investment horizon is longer, say 3 to 5 years.
CONCLUSION : –
Making and saving money are not guarantees of financial success; rather they’re prerequisites. If you don’t know how to choose sound investments that meet your needs, you’ll likely end up throwing money away, which leads to the same end result as never having earned and saved it in the first place. Worse still, you won’t be able to derive any enjoyment from spending the lost money on things that you perhaps need or want. Knowing the rights and wrongs of investing is vital to your long- term financial well-being.