Originally Posted on ivyhesse.com
If you can answer this question, then you may know more about investing and saving than most people outside the finance and investment industry. The fact that you cannot answer this question definitively doesn't mean that you are not already capitalizing on what the investment world has to offer. The difference between a majority of those who can answer this question and those who are not so sure what the answer is, is how far they believe finance and investment principles and terms are beyond their ability to comprehend and put into practice.
In reality, most of us, especially the working age group, have dabbled or are dabbling in one venture or another that qualifies as an investment of their resources, such as the shop you own, or the taxi business you started with your friend, etc. But we do not usually see these as investments in the formal way that the term connotes in our minds, because they may not formally be listed on a recognized stock exchange or were not recommended by your investment adviser or broker or other finance professional.
But these all qualify as investments, regardless of their lack of lofty descriptive financial terms. The value that the investment industry principles, institutions and professionals add to this process is the structured methodologies and principles that shape your approach, helps safeguard your investments and tailors your investment basket to fulfil your goals for investing in the first place. Not all investment opportunities may be good, appropriate for you and it is by understanding yourself and the opportunity that you know what to do. These are what finance and investment professionals help you to do.
So, how do we know whether we are investors or savers or none of these and why must we be either or both? We first need to know what these mean in our everyday life.
Saving: What is it?
Let's assume you purchased a white blouse or shirt that is in vogue and you decided you do not need it now because you have enough to wear and decide to put it aside to use in the future. Some months or years down the line, you are invited to an important function that you feel deserves the outdooring of this shirt. You pull it out of your drawer and its packaging to check it out. A number of things happen with time to both you and the shirt that can affect your ability to effectively use this shirt that you saved for just such an occasion:
#1. The shirt may be exactly as you left it, but the style may no longer be in vogue
#2. The shirt may have lost its lustre, changed colour or may have been destroyed by moth and is now no longer wearable
#3. The shirt may be exactly as you left it, but you may have grown lean or too fat, and now wouldn't fit as well as it did
To save something is to store or put aside something you own that you have no use of now, in anticipation that in the future when you need it, it will be available for you to use, exactly as you left it. So to be a saver, you must meet these criteria:
- Have an excess or not need something that you own now which is an asset to you
- Set that asset aside in anticipation of future use
- Expect that when you need it in the future, it will be exactly as you left it
But the key lesson that we get from above is that ‘time happens’ to everything that we own and we must not merely save our assets or things that are of value to us but we must take additional steps to safeguard their value so they will at a minimum, be at least as valuable in the future as they are now and at best, more valuable with time. That is where investment comes in.
Investing: What is It?
When you invest, you take something that you own that you do not need now and put it to use in anticipation that whatever you have employed it in, will give you some reward in the future that will add more to it or make it grow to be more than it is worth now.
By investing, you put your money to work for you as you work to make more money, You create more wealth and you grow that which you have saved, so its value may at worst stay the same or at best be worth more in the future through the reward or return that you get on your investment. The expected reward or return depends on the nature of what we invest in and this reward may be exactly as we anticipated, be less than or more than anticipated.
This uncertainty surrounding how different the reward that we actually receive is from what we thought we were going to receive is what is termed ‘Risk’ in investment and it depends on the type of investment. But the rule of thumb is that, the more ‘Risky’ the opportunity, the more likely that the reward will be far different from what you thought in the beginning, either better or worse. And the riskier the opportunity, the more reward you should ask for or expect before you jump in. We will talk more about risk in subsequent posts.
TO BE AN INVESTOR YOU MUST FIRST BE A SAVER.
So how are saving and investing linked?
All resources that we put to work through the investment process must have first been accumulated through saving. In the finance and investment world, the resource that we put aside or save in order to invest is our excess money. Saving allows you to accumulate something valuable that you can now employ to generate more for you through the process of investing:
- To be an investor, you must first be a saver
- To be a saver, you must have money that you do not need now and set it aside
- To be able to set money aside now, you must consciously set aside part of what you earn that will not be spent, no matter how small
Start your investment journey now from the bottom up, set something aside from what you earn. This is not dependent on how much you earn or how little you can save, just make a conscious effort to save something.
But I would love to read your comments. What steps are you taking to start spending less and saving? What stage are you in the saving-investment spectrum? What are your challenges?