Family investment planning

Why invest in a better future, for you and your family?

Understand the benefits of investing – from achieving your dreams and creating wealth to embracing uncertainty and planning for emergencies.

While everyone often dwells in the past to understand the financial decisions made for their future, and for many, it is highly possible that nothing went as planned.This brings our attention as to why investing intelligently and planning your finances strategically can mean a secured future for you as well as your family, in spite of uncertainties.To understand why you need to invest and what factors will lead you further to make better financial decisions, let us take a deeper look.

 

Embracing Uncertainty

With the current pace of technological trends changing every second, there is uncertainty booming in every nook and corner. One can define personal success and consequently one’s financial stability based on one’s career progression, current lifestyle, the amount of savings, and the assets owned. Nevertheless, the reality of unpredictability in every facet of life has to be accepted by an individual. This helps you to grow out of your comfort zone. Despite the barriers, one might face in the future, people who are willing to take extra precautions and make uncomfortable but calculated, measured and planned decisions are the ones who will succeed. Moreover, this particular principle of “Embracing Uncertainty” applies to all aspects of an individual’s life, especially financial decisions. The time value of money, the concept that money available today is potentially worth more than the same amount in the future due to its potential earning capacity, is uncertain and often leads an individual to invest in different avenues to yield better rewards in the future, instead of holding on to it as cash. We believe that it is important to understand and start saving as well as investing (as part of a diversified investment portfolio) to truly embrace uncertainty.

 

Savings Vs Investment

Savings is a term used to refer to the amount of money one has saved, usually at a bank. The reference to saving usually implies a liquid way of saving so that you have easy access to it at all times (cash under the mattress approach and a bank’s current account comes to mind). Savings are safer in some sense compared to investments as they do not face the risk of loss due to exposure to some form of a risk-seeking asset or product. Banks do tend to provide interest to some form of savings though the returns are usually not very attractive.

Investments, on the other hand, involves using one’s money or savings to buy assets that are likely to yield higher returns though, as mentioned earlier, it will almost certainly come with additional risks, including potentially not having immediate access to your money. However, with a proper systematic approach, planning, understanding your personal circumstances as well as the risks involved and proper due diligence; investments may provide abundant opportunities for profits or meeting one’s personal goals. And it is only logical that individuals who start investing from a younger age build wealth faster and end up with bigger sums (verified by data). Essentially, the older a person becomes, the lower the risk they should be taking due to not having enough time to make up for any losses as investments can be volatile, resulting in lower returns. And starting to invest early also means more time to save and more time for your returns to accumulate.

 

Fig 1. Rating of Investment Goals by Age, (Source : Jeff Desjardins via visualcapitalist.com)

 

When considering savings and/or investments, don’t forget to take independent financial and tax advice if you need it. In addition, you also have access to online investing tools to help make investments decisions a bit easier. A word of caution, with any investment tool, be sure to understand how they work and the underlying assumptions – knowledge is power after all. You can also check out our simple investment calculator to give you an idea of what your savings can return after a selected period of investment at: www.ziskproperties.com

 

Benefits of Savings and Investments

We have already looked at some of the reasons that may lead an individual  to the doorstep of investments. It is now vital to understand the numerous benefits they bring alongside that makes it necessary for every individual to consider them seriously.

 

Planning for the Unknown (Personal Emergencies)

We talked about embracing uncertainty earlier. Life brings other forms of uncertainty as well that we need to embrace by planning for it. Can one guarantee that one won’t be hit by the ‘proverbial’ bus tomorrow? Or to make things a little less terminal, one simply isn’t aware what sort of a challenge life may throw one’s way; a medical emergency or an accident affecting one’s ability to earn, loss of job, theft or fraud (one will be surprised that while in the UK, we take some of these protections that are automatically provided to us for granted but across the world, others may not be so lucky). There are various mechanisms one can use to have some protections in place for you and your family – the two chief ones being:

1. Different types of insurance

2. Savings and Investments

 

Safety against changing economic trends

Economic trends are another form of uncertainty. Inflation in an economy has a significant impact for all individuals, as the prices of goods and services increase with the passage of time, reducing the purchasing power of currency. Other economic factors, for example, the increase in money supply locally, imports and exports of the country, GDP growth or recession, foreign exchange markets and the demand of pound sterling vs other currencies are all factors that can significantly affect can lead to a further reduced value of the currency. Due to these reasons, investors tend to develop their investment portfolios in a way as to provide protection against inflation as well as economic trends.

 

Life Goals including financial freedom

On the more positive side, an individual’s life goals may include wanting to be able to afford or save up for a lifelong dream or just an expensive outlay e.g. own a house, buy a car or an expensive diamond earrings (or ring) for your loved one, or save up to go on that cruise you have always wanted to go or pay for your child’s wedding or university. These are just a few examples of the long list of wants and needs that you may have. In other words, you target financial freedom, i.e. have enough savings to afford the lifestyle you want and when you want, rather than living from one salary to another. So start saving or investing now – passive income can be a big factor in achieving financial freedom so read on.

 

Passive Income

Any income that requires devoting a small amount of time and yields substantial income compared to a regular full-time job is considered as passive income. So regardless of the number of hours an individual spends on a regular job, their passive income proves to be an added layer of insulation against uncertainties as well as a supplement to meet the continuously increasing costs of living. Investing in the right avenues over time may even lead to the creation of passive income that is higher than the mainstream or active income. Through a diversified investment portfolio, you can ensure that the returns can be maintained over the years as a passive income. Refer to our soon to be released article on how to invest that explains the concept of diversification.

Investment as passive income

Fig 2. Linear Income vs Passive Income (Source: Casey Botticello via medium.com)

 

 

Retirement Savings

You would ideally like to retire at the age of – well as quickly as you can, right? But you will need a fund to support your retirement. A pension scheme (likely a legacy and generous defined benefit scheme or the more common and more riskier defined contribution scheme maybe your options but this is heavily reliant on your employer) or an annuity may be an answer or a partial. However, for early retirement or to maintain the same standard of living after retirement often requires some meticulous planning. One needs to understand your likely needs in the future including allowing for fixed expenses or costs, any paid off-debts e.g. mortgages are aimed for retirement age, any old age benefits (don’t worry, age is just a number – that is mainly good for securing discounts on various things e.g. reduced travel tickets) and so on. Don’t forget the emergency fund as well as the dream fund (from personal goals above) and likely medical bills (while age is just a number, old age does mean the doctor becomes a more frequent visitor). And then the income you need based on these estimated costs. If you work backwards in this way, you will have an idea how much and when to start saving or investing. Some investments and savings products (called income drawdown products) can even provide income during retirement while still having access to the capital amount.

 

 

Fig 3. Percentage of people with retirement as an investment goal (Global),

(Source : Jeff Desjardins via visualcapitalist.com)

 

CONCLUSION

To conclude, owing to all the uncertainties that you may face, understanding and making investments while taking calculated risks and moving  forward should be the primary focus of your life. This may help deal with unpredictability and rough nature of finances. And to secure a better future against all the odds, properly planned investments with some safety margin can be a go-to approach.

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