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FKD 101

FKD 101: What Are Investments?

While advancements in botany haven’t allowed us to fulfill our dreams of growing money on trees, we can still grow our wealth with investments.

An investment is when we buy an asset today, such as stocks, bonds, real estate or mutual funds, with the hope that it will increase in value at a later date. Once the value goes up, we can cash in on our asset, selling it for a higher price than we originally paid and, thus, realizing the value of our investment.

Buy today, ball tomorrow

The first step to becoming the next Warren Buffett is to decide which type of investment you want to make: a fixed income investment or a variable income investment.

Fixed income investments have a continuous, set return over a certain period. The rate of return is set in stone when the investment is purchased. With this feature, the investor knows exactly how much money she will get over the lifetime of the investment. Examples include treasury bonds and certificates of deposit (CDs). Fixed income investments typically bring in less cash than variable income investments because they have a set return, and they aren’t as uncertain.

Variable income investments, however, have payments that fluctuate because they are controlled by market forces. Examples include business equity and property investments. Because returns on variable income investments are dictated by much more unstable forces, the risk and the chance for reward are high.

Risky business

The thought of making tons of money off of an investment might have you rocking out Tom Cruise-style in your boxers, but it’s important to take into consideration the risks associated with investing.

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When making an investment, you need to do your homework. If you’re buying stock in a company, make sure that it seems prosperous, or at the very least, won’t go under before you can cash out. If we’re talking real estate, make sure that your construction project isn’t conveniently placed next to a sinkhole or near a flood zone.

Even with lower-risk investments, like bonds and CDs, it’s important to make sure you’ve covered all the angles and understand the finer details.

Two popular options are keeping your money in an interest accruing savings account, or by investing it in a mutual fund. By keeping your money in a savings account you can ensure that your $50,000 will remain roughly $50,000, depending on the amount of interest your bank gives you per year. Typically, interest in these accounts is quite small and the account holder is oftentimes actually losing real value on their cash due to inflation.

By investing your money in a mutual fund, an investment firm essentially pools your money with other people’s and invests it in stocks, bonds and other securities. It is riskier to put your money in a mutual fund, but the returns can be much greater than letting it sit in a savings account.

Can I buy a brain?

We often associate investing solely with the buying of assets like stocks and bonds, but the term can also be used to refer to intangible things, like paying tens of thousands of dollars for your economics degree or buying that coffee to expand your professional network.

Just like that share of Apple stock you snagged, you don’t start seeing a return on your investment in a college degree or well-placed contact right away. But it’s when you land that dream job or negotiate your promotion that you realize the value of investing your time and money on the college degree or super-exciting networking java.

Who wants to be a millionaire?

Despite the inherent risks and upfront costs involved with investing, it is still the best way to grow your wealth. The longer you invest, the more likely it is that your assets will appreciate in value.

In order to get the most bang for your buck, you need to invest early and spread your money though a diverse financial portfolio. By starting early, you’re giving your investments the maximum time to gain value. By diversifying your portfolio, it prevents you from losing all of your money if your one investment tanks. Don’t be afraid to literally spread the wealth and put your money into a mixture of investments.

Mom and Dad might’ve always told you it’s better to be safe than sorry, but with a little extra homework and a bit of patience, you can cash in your investment for a beach house in the Hamptons.

 

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