The importance of saving is well known to all, especially because there are more and more financial institutions that flood us with publicity about it. Just look at the commercials about the “savers”, the “crusades of savings”, among others. While it is true, saving allows us to consolidate our assets, but to reach many of our financial goals it is necessary to go further.
In one of my articles (“The time to start is Now”) I commented on the importance of interest capitalization. As you will remember, the longer the term, the greater the final capital we obtained. However, there is another important variable in this process: the interest rate. A 6% capitalization is not the same as a 10% capitalization. This is precisely the central point: If we want the rate at which our equity is capitalized to be higher, we must be willing to face a greater risk.
This does not mean taking unnecessary risks
To better understand this I would like to introduce two simple concepts: income and capital gain. Suppose that two years ago we bought an apartment for USD 150 thousand and we are renting it. The monthly payments we receive for the rent are called “rent,” that is, a constant and periodic flow of income. If at one point in time we decide to sell the apartment for USD 200 thousand, the difference between the purchase and sale price (USD 50 thousand) is called “capital gain.” Keep in mind that the sale price could also be lower than the purchase price (loss of capital = risk). These two elements constitute the pillars on which our heritage is built and consolidated, and in turn serves us to understand.
Difference between saving and investing
- Saving seeks to preserve our capital, without risking it. This type of financial asset only generates income. The classic vehicle to achieve this is a savings account or a term deposit. As we pay funds to our account, interest is capitalized and we grow our assets. However, being a low risk alternative, the return (interest rate) is also lower.
- Investment implies taking a greater risk and allows us to generate income and capital gain (loss). This higher level of risk leads us to a higher average return. When we have ambitious goals, it is necessary to have a professional and diversified investment plan. For example, in developed countries people begin to invest for their children’s college fund since they are born. Likewise, in many places people take parallel investment plans to improve their future retirement pension.
In order for our heritage to grow over time, both elements must be used. Saving allows you liquidity and preservation, while investment generates growth and accumulation. Both are necessary in any wealth generation plan. The savings must be allocated for contingencies of our Human Capital (see “Initial situation before investing”). For example, it is known that our savings fund should cover at least 3 to 6 months of monthly income. Because a savings account is liquid, it will allow us to access our funds immediately before any contingency.
Once this part is covered
The investment process must begin. To do this we will make a brief analysis of the initial situation and take into account our medium and long term objectives (see “Let’s learn to pay our tip”). We must bear in mind that, unlike saving, investment is a much more complex process, which is why we will surely require the intervention of a financial advisor. Below I detail some of the investment vehicles that will allow us to consolidate this process.
- Mutual funds and non-pension funds:
They allow us to access a diversified portfolio without the need for high investment amounts. This vehicle takes advantage of economies of scale to offer us different alternatives in assets, regions, currencies, etc. The variety of funds is wide, not only at the local level, but especially at the international level.
- Direct Investment:
It is when the investor makes his investments directly through an intermediary (broker or bank). Having no economies of scale, this vehicle requires larger amounts of investment. Additionally, the person is required to have the necessary time to analyze the market options and execute the purchase / sale operations.
- Discretionary Administration:
This alternative is for people or families with a medium or high heritage. It consists of delegating the administration of the assets in a professional manager, who will be in charge of structuring a customized investment portfolio. This alternative is like having your own mutual fund.
- Investments in the real sector:
Purchase of real estate, own company, among others. These types of investments are high risk, insofar as they are concentrated in a single type of asset. They also require high investment amounts and specific knowledge about the sector in which we are entering. Sometimes it is better to make these investments through mutual funds or mutual funds (real estate funds, infrastructure funds, private equities), in order to diversify and reduce risk.
Remember that there is not only savings
As a vehicle to achieve our financial goals. We must begin to create a culture of heritage investment, which gives us greater alternatives and opportunities in wealth creation. However, they should always be properly advised to avoid taking unnecessary risks. Another important point is to stop thinking that our savings or investment can only be made within the country. Internationally there are greater investment options for all budgets. I invite you to get proper advice and start growing your assets!