Take ownership in managing your finances-(Investing)

So far, we have gone through the particulars of managing your finances on a day to day basis to ensure you have a solid foundation for success in the long term. In this article, my intent is to simply the art of investing to allow us understand how we can make our money work for us. There has been this common misconception that in order for one to become successful financially, you probably have to make a six figure salary, inherit or even win the lottery. The fact is, that’s not true at all. If we lay out a plan and take time to learn a few principles on how money works, we all have the potential to become financially independent no matter our income levels. To begin with, let me define investing; it is the expending of money (putting away) with the expectation of getting profit or to grow for long term financial gain. Put it this way, if you put away $100.00, you expect it to grow to $150.00 by the time you need to make use of it. Investing is different from savings, in the sense that with savings you are putting away a portion of your income in order to achieve as short term goal. For example you save to buy a car, furniture, vacation or even a wedding. On the other hand, investing is based on long term goals, accomplished by having your money make more money for you. There are many reasons why we invest and of course this reasons vary from individual to individual. Mostly we invest to achieve some financial goals, such as funding college education for our children, retirement (it may seem so far away, but it will come someday) or even enjoy the luxury of retiring early, and enjoying the rest of your life travelling and being on the beautiful beaches across the globe. Lastly, we invest to try and beat inflation (rising prices in goods and services). There are very many ways that one can invest, including stocks, mutual funds, bonds and even real estate.(more on this to come in future articles), but before you take that leap, there are some basic essentials that I would like to share with you. Understand the time value of money; the sooner you start the better it is, the younger you are the better. There are only two things that life gives you, opportunity and time. If you are young and have time on your side, you can invest in small amounts and end up with lots using the power of compounding interest (adding interest to principal). For example if I invest $100 at a rate of 10%, at the end of year one my interest will be $10.00, with compounding interest, you take the $10 and add it to the principal, such that in year two, my principal is now $110.00 Secondly, the rule of 72, what this measures is the time it will take you to double your money. In our example of $100, if say I was getting a return of 5%, it will be 72/5, which gives me 14.4, hence in 14.4 years, my $100 dollars will have doubled to $200.00. The rate of return is a critical factor in building financial security, even a few percentage points could be of great significance in the long run. That’s why it’s important we consider the rate of return we get from our investments. Before you get into the world of investing, ensure that you have a plan with goals that you intend to accomplish. (You can never reach a destination which you do not know), and such setting goals will allow you to stay motivated to accomplish them and also a way to measure your progress. One of my biggest advice is ensuring you are out of debt; it is the biggest enemy for our quest for financial freedom. The power of compounding interest works against you. Most of the credit cards charge interest of between 19.99-30%. You are not going to make such returns in any investments in my book, unless it’s those get rich scams. And that’s why I insist that the quicker you realize this, the better. Secondly, as suggested in my earlier article, avoid the credit card trap; use the cards if you know you have the funds in savings account to pay the amount in full at the end of the month. If you ignore this basic rule you will be helping your bank increase their profits for the shareholders, while you struggle to achieve your financial goals. In the end we need to change our priorities on how we manage our money; if you make $1000 a month and spend, $1200, you are a disaster waiting to happen. Discipline is key, to whatever goals we set. Remember it’s not what you make that matters, it is what you keep that will ensure you have financial independence in the long run.