Reasons for investing money
Now that you know a bit about income, expenditure and saving, you can build your financial management skills by learning about investing your money. This chapter will introduce you to the basics principles of investment.
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What is investing?
Investing is the outlay of resources in order to gain more resources. Resources may include anything of value, from money to shares in a company, or property, depending on where you would like to invest and what you would like to achieve by investing.
Saving involves the outlay of money for later use. The main difference between investment and saving is that with investment there is the expectation that you will receive more than your initial outlay in return. Some people regard investing as a form of gambling because, although there is an expectation of receiving more money than you outlaid, it is also possible to lose money in investments.
As an investor, you become the lending party and the money that you outlay goes towards a 'borrower' who will make use of it and pay back a return, much like the principal and interest installment a debtor might repay if they took out a loan. The borrower may be a business, such as a financial institution or a for-profit company, or an asset such as a property that you hope will return more money in the future.
The amount you receive as a return depends on the risk you took; in general, the higher the risk, the higher the return but the higher the chance of failure. Remember that when a lending institution assesses a borrower's ability to repay a loan, they are assessing the risk that they may not be able to meet repayments. With investment, the risk is subject to the health of the economy and market demands.
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Reasons for Investing
People invest in order to get more from their money in the future than its current value. The 'future' may be in a couple of weeks or a couple of decades depending on the term of investment and the investor's intent.
Some people use their investment as a form of saving so that they can eventually make a major purchase. In this case, they expect that while they are not using the money it is earning more than if they had just put it aside. If you stored cash in a jar under your bed, the money would eventually lose its worth due to inflation, the decline in the value of money. If, however, you invested the money in a basic savings account, it would earn interest corresponding with the rise in inflation, meaning that it would at least be worth the same amount as when you deposited it.
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Investments are also a source of income, especially if you receive money on a regular basis from them. Many people own investment property that they rent out to business or residential tenants, where the rent they receive represents all or part of their income. Shares in a company pay regular returns called dividends when the company makes a profit. We will go into more detail about types of investment in a later chapter, but these are just a couple of examples where investors outlay money in order to earn an income.
Many people like to invest for retirement, which is a combination of investment as a type of saving and a type of income. In addition to compulsory superannuation, where the superannuation company invests money on your behalf and you receive a return upon retirement, you might choose to make private investments to boost your finances for retirement. Investors in superannuation want to ensure financial security when they are no longer working and the extra return may mean that they can maintain a reasonable standard of living.
In some cases you may wish to help others with your investment as well as make money for yourself. This is especially true of ventures that require capital to start a business, such as if you invest in a company via shares or debentures, where a company assumes a debt to the investor. In this instance, your investment helps start the company in the hope that you will receive a return if they succeed.
Ethical investment
Ethical investment is a form of investment where an investor outlays their money with regard to what they believe is right, not just on the financial return. Ethical investors take a holistic view of their investment by examining how the money will be used. An ethical investor who cares for the environment might therefore refuse to invest in a mining company, for example, or an investor involved in human rights might decline to invest in company known to treat their workers badly. This form of investment is highly subjective, based on the investor's personal politics.
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