Only if money could grow on trees, then there would have been no race to earn more, but in reality, this is not how our finances work. We all want to fill our pockets a little bit more than we get. The lifestyle we live now days is quite luxurious and it demands good income to maintain the same.
Buying a smartphone or planning a dream holiday does cost a lot. So how to add extra bucks and find a safe process to do that?
Investment is your answer; it refers to the process of investing money for making a profit. It’s a long term saving plan. It’s a process of putting your money into some financial outlets like shares, bonds, real estate, P2P lending or anything that will generate income in return. But there are various risk factors associated with the investment as well; it ranges from high to low. A few of the risks associated are the interest rate, political risk, liquidity risk, purchasing power risk, etc.
Though there is no such thing as a no-risk investment yet there are few which are safer than the other. So what is the difference between high risk and low risk? In high, there are more chances of loss but they attract investors with comparatively high returns. On the other hand, low risk is quite safe but provides comparatively fewer returns.
Understanding different types of investments
You can open a savings account at any financial institution; here money deposited can increase with interest rate applied by that institution. But there is a drawback of losing money if your account is paying you 1 % and there is inflation, which is around 4 %, and then you are losing 3% a year. But then, they come with a good advantage where you can easily access money any time you want.
The next option is issues of certificates of deposit by any financial institute; it could be quite beneficial to you as an investor if you know about your future purchase. It guarantees a definite interest rate over an exact time like 6 months, a year or over 5 years. But the major drawback is a penalty if you withdraw money before time decided.
Money market account, offered by banks requires keeping a certain amount of balance to qualify yourself for high-interest rate, but you may be paying a slightly high rate as compared to the savings account.
It comes with a feature of being less risky and liquid. Stable value funds have a purpose of preserving principal. It ensures to protect the investor against loss by continuing to receive decided interest payment regardless of fluctuations.
Issued by insurance companies’ fixed annuities, they give you a fixed interest rate. There is a penalty as well if you withdraw money before time. The major risk you face is that if the company goes down your investment does too, but if you are under state guarantee limit it might get protected.
In Immediate annuities, you get a specific monthly income. Your money can get exposed to risk if an insurance company which issues these annuities goes out of business. It is most beneficial for retired people who want permanent monthly income for the rest of their life.
Peer to peer lending: It is a digitalized platform where the transaction of funds is done online. Instead of saving money, you can lend it to someone who requires money. As a lender, all you have to do is register yourself. After checking your authenticity, a borrower, the one who requires money will contact you with its needs. You as a lender can check borrower’s background, their income, and ability whether or not they will be able to pay the money back or not. Credit score check is a must in the lending process.
In P2P lending you receive good returns and there is flexibility when it comes to fixing terms of borrowing and lending. This process of lending money is carried out online and to optimize the risk, it follows the process of diversifying the money.
When to go for such investments
In situations where you have extra money saved, you can earn some profit by investing, which in turn can be used for emergencies in the future. You can invest money if you know you won’t require this money in the near future.
Investing is a good option for increasing cash flow. It ensures long term security and helps in making productive use of the money.