With millions of people in debt, people who earn more than they spend should consider themselves lucky.
However, even many of those folks are in debt to mortgage companies and vehicle lenders.
As of November 2012, average UK household debt including mortgages was £53,867.
Take debt out of the equation and the average UK household still owed £5,914. As the saying goes, one must spend money to make it and that is why so many people invest in the markets.
Saving Is Not Investing
Many people consider saving and investing to be the same but they are not. Though each represents something we can do with spare money, saving is an almost automatic process of stashing away funds for a rainy day, providing a feeling of security.
Investing is a conscious effort based on future plans. People invest to repay their mortgages, retire, or support a life of leisure. Some invest to fund a specific event such as university attendance or a wedding for a child or grandchild.
Security is another major difference between saving and investing. When people save money, they are usually guaranteed to receive the amount they saved plus interest earned by a deposit account. With investing, there is no guarantee of emerging a winner.
While capital is secure with savings, it is at risk when investing. In exchange for taking this risk, investors expect to recoup substantially more than they invested. Some use investing as a way to earn ongoing income from share dividends.
People should think about several things when they are considering an investment. They should first verify that they understand the investment because while some are straightforward others can be very complex. They should also explore how much return the investment could yield and the probability that it will yield it.
Last, but perhaps most importantly, is ensuring that they understand the potential volatility of the investment and the risks that they are taking by placing their money into it.
What To Do Before Investing
Before entering the world of investments, it is important to get finances under control. This begins with getting out of all debt aside from a mortgage. There should be no car loans, personal loans, credit card balances, or other debts. Why worry about this when there is money to be made through investing? Interest on debts is usually higher than returns earned by investors, making debt repayment a smarter investment.
Once debts are eliminated, money should be set aside for emergency use. The amount of savings recommended is based on personal situations including job prospects, quality of life, and number of dependents. The general rule is to set aside enough money to live on for three months if no other income is received.
The final step involves preparing oneself to invest money for at least five years. Capital value of investments fluctuate continuously so if money is needed quickly, the full investment may not be recoupable. If a guaranteed sum is needed in less than five years, a high-interest savings account may be a more suitable option.
Considerations When Investing
Selecting the best investment requires determining a goal. Most people invest for retirement so they can live on more than what the Basic State Pension provides. An aging population means more pensioners and this has led to relatively modest pension increases and delayed the collection age.
Investors who are not concerned about their own futures may be worried about those of their children or grandchildren. Providing a lump sum to someone starting out can make a world of difference. By entering the market gradually and investing wisely, people can earn decent returns for these and other purposes.
