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When we begin to invest or to explore investment options, the first thing to do is to determine the steps required to reach our financial goals.
Do we wish to retire with substantial funds or do we want regular monthly income? Are we thinking about our children’s education? Thus, the key is to identify our goals and what we need to do with our finances to reach those goals.
Why invest instead of simply save? We must invest so that our money grows and we’re protected against mounting inflation. If prices go up four percent annually, it won’t be enough for our savings to increase only by three percent. We’d end up with a one percent deficit. The idea is that investment gains should be bigger than the rate of inflation, thus leaving a good surplus after a certain period of time.
Whether your money is invested in stocks, bonds, mutual funds, or CDs, the end result should be the creation of wealth for your retirement, wedding, college tuition, vacations, a better standard of living, or to pass on your fortune to the next generation. In addition, it is always good to review your investment earnings and see how they’re growing at a faster rate than your salary.
While we cannot recommend any particular investment products, you must know that there is a wide variety of options – including stocks and stock mutual funds, corporate or municipal bonds, bond mutual funds, life cycle funds, exchange-traded funds, money market funds, and U.S. Treasury securities. A good strategy for many financial goals can be to invest in a mix of stocks, bonds, and cash. Let’s take a look at the characteristics of the three main categories of assets.
Stocks are a financial instrument that entail ownership of shares in a corporation. Bonds are long-term promissory notes whereby the issuer agrees to pay the owner the stipulated nominal value at a future date and to pay interest at a specified rate and at specified intervals. Cash and its equivalents – such as savings accounts, CDs, treasury bills, deposit accounts in the currency market and currency market funds are the most secure investments, but they offer the lowest earnings of the three investment categories.
Stocks, bonds, and cash are the most common investment categories, and the ones you’ll probably choose when saving for retirement or college. However, there are other investment options – including real estate, precious metals, and other commodities, as well as private investments, and some investors may wish to include those categories in their portfolios. Before making any investment, it is important for you to understand the risks involved and to make sure the level of risk is appropriate for you.
For more information and examples on this topic, see “Resources for a better financial future” in the Web site of The Aspira Association http://www.aspira.org/. This publication was made possible by a generous grant from the FINRA Investor Education Foundation.
FINRA Investor Education Foundation
The FINRA Investor Education Foundation, established in 2003 by FINRA, supports innovative research and educational projects that give underserved Americans the knowledge, skills and tools necessary for financial success throughout life. For details about grant programs and other FINRA Foundation initiatives, visit www.finrafoundation.org.