In my previous article regarding Time Value of Money, if you have extra cash, it is better to invest it somewhere since keeping it in your drawer or cabinet alone is not the right approach. Doing so will let your money be subjected to a depreciating purchasing power as every year, inflation rises. Let your money work for you. Make your cash work hard for you as you have worked hard to earn it. Here are some of the reasons on why do you need to invest.
As discussed, there are three considerations in making an investment decision. You need to assess yourself first about RETURN, RISK, and LIQUIDITY.
Now, after carefully weighing these three considerations, you can then proceed to invest your extra cash. Here are some options that you may explore as an investment vehicle for your cash. Note however that each of these investment vehicles require minimum amounts and for some, even involves a holding period.
Savings – This is the most common and easiest form of investment. Just park you extra cash in the bank. The interest, nowadays, ranges from 0.5% to as much as 2.5% per annum.
Checking – A checking account with a bank means that you can withdraw your money anytime by using a demand draft or a check. Because of this, most banks do not pay interest for money deposited in a checking account, although there are some special checking accounts that have interest.
Time Deposits – These investments earn higher interest than a savings and/or checking accounts. The catch is that your money is tied up and you cannot withdraw it before the agreed time period elapses. In case you violated these restrictions, you will incur a penalty.
Bonds – These are like public investment outlet units of public and private corporations. By buying bonds, it’s as if you are lending money to a corporation. The bond certificate promises to pay you a fixed interest after a certain period of time. For more details, visit my article on investing in bonds.
Stocks – For those who have high tolerance for risks, you can go into the stock market as a long-term investor. Buy blue chip stocks that you plan to keep for a long time. Just remember, buy low and sell high. For new players, here is an overview on how stock market works.
Unit Investment Trust Funds or Mutual Funds – Trust Departments of banks and Mutual Funds of investment corporations both work this way: You deposit a minimum amount and the bank will invest the money for you, in various high-income and high-risk investments. They get a commission on the earnings, and the rest is yours. So it is possible that you will receive more interest than a specified time deposit account. But you can also get less, if the investment does not make enough. For more information on UITFs and Mutual Funds, you can refer to this article.
Treasury Bills (T-Bills) – Treasury bills are National Government’s investment outlet units issued through commercial banks. These are like bonds but issued by the National Government. And so, by buying T-Bills, it’s as if you are lending money to the National Government. And it also has a certificate which promises to pay you a fixed interest after a given period of time.
Foreign Exchange (FOREX) – Open a dollar savings account or any currency of your choice along with your local currency. Do not overdo it though. The market is volatile at times, and you could lose money if you do not do it wisely. Invest in dollars or in any currency when the rates are going up.
Real Estate or Land – Some Filipinos find this as traditional safe havens for their excess cash. Depending on the location, real estate is not easily converted into cash when your need arises. Some investors go for growth of their real estate or land investment, others for their marketability. For readers, I would recommend to consider the ‘best location’ when buying a property together with the affordability of the price, of course. A very good real estate investment can be a ‘self-liquidating asset’ that can give you huge passive income in the future. Consider this situation: Buy a strategically located condo where you can have instant tenants! Just pay the down payment and the rest of the monthly amortizations will be paid by your tenant’s monthly rental payment.
You can refer to my article on real estate property investment tips.
Retirement or Pension Fund – Many insurance companies offer this kind of fund where you receive a monthly pension after reaching a certain age beginning 55 years old or above. Or alternatively, you can also receive its cash surrender value upon maturity of the fund.
Educational Fund – We all know that education costs a lot. This kind of investment is best for people who have school-age children or dependents. Get an educational plan as early as possible from a reputable company. Many who availed of such policy years ago now reap the benefits considering that college education nowadays involve huge expenses.
Life Insurance Fund – You do not benefit from this investment but your beneficiary will. This is a form of investment that protects the most important asset and that is yourself. You need to invest in yourself. Without you as an income-generating individual, especially if you are a breadwinner of the family, your family will be at a big loss. Avail of a plan that gives your beneficiary double benefits in case of your untimely death. There is also so-called ‘variable life insurance’ where a huge portion of your premium payment is allotted to several investments depending on your choice and risk appetite. In this scheme, this will give higher potential returns. Ask your insurance agent about it.
Memorial Plan – This may be scary but true! Life is full of expenses up to the very last minute which is your death. Do not make it difficult for your loved ones you leave behind when you exit the world. We all have to go eventually.
Jewelry – When you want to invest in jewelry, I do suggest going for gold instead of precious and semi-precious stones. Gold’s value has appreciated over the past several years. More so, gold can easily be pawned while stones are frowned upon as pawnshop collateral.
Durable Goods – These can be furniture, art paintings and sculptures, antiques and the like. Quality is the key word to call this as an investment.
Lend Your Money – Of course with interest, a collateral and a signed and notarized promissory note. Ask for postdated checks as your assurance for payment, and do not forget to register your real estate mortgage or chattel mortgage if you receive collateral. You can ask your city hall register of deeds for this.
Invest In a Business – If you want to avoid the hassle of putting up and managing your own business, then become a part of an existing business venture. This principle applies to Multi Level Marketing systems or MLMs. If you want to join in an MLM company, you might as well read these 25 questions to ask your sponsor.
Pay Off All Your Loans – This is especially true if your interest payments are more than what you can earn by investing your excess money. Sometimes, being debt-free is more than a payoff.
So if ever you have that extra cash, it’s a must to invest it to fight that inflation! Regular saving and investing are the only key to achieve our financial goals.