Making Your Money Work for You
You have just completed the necessary step to examine and diagnose your financial planning process. You are now ready for the next step. The concepts and principles of investing discussed in this section may be considered a prescription to aid in the improvement of your financial health.
No one financial prescription is right for everyone, just as no single medical prescription can be applied with equal results. Once a recommended action is taken, it is important to monitor the results and make any adjustments that may be necessary on a regular basis.
An I.D.E.A.L. investment portfolio would contain the following prescribed ingredients:
• Income (bank account interest; stock dividends; municipal bond interest)
• Deductions (an IRA; your home mortgage interest payment)
• Equity buildup (mortgage reduction on your home or income producing property)
• Appreciation (increase in stock or mutual fund prices)
• Liquidity (easily convertible to cash in an emergency—money market funds, savings accounts, stocks)
Everyone would like a good return on his or her investments. What constitutes a good return depends on several things: your personal circumstances, your tolerance for risk, and the characteristics of a given investment (such as liquidity, capital appreciation or tax deferral).
There is no single best or perfect investment. Each has strengths and weaknesses that must be considered in light of your particular needs. For example, you must consider whether you are willing to risk a loss of principal for the possibility of a higher gain. This is important considerations for making your money working for you.
The two basic categories of investments are growth and income. Generally there is more risk associated with growth-oriented investments (i.e., a share of stock) than with income-oriented investments (i.e., savings account).
Income-oriented prescriptions (i.e., RxS) would include: U.S. government securities, corporate and municipal bonds, single-premium deferred annuities, savings accounts, income mutual funds, money market funds, and certificates of deposit.
Growth-oriented Rxs would include: stocks, variable annuities, growth mutual funds, and real estate.
Speculative investments (which offer growth opportunities but also substantial risk) include: commodity trading (precious metals, pork bellies, etc.), equipment leasing, research & development programs, raw land, oil and gas exploration and some types of limited partnerships.
Remember that normally the greater the potential reward (gain), the greater the risk. This is basic principle in making money working for you.
Always obtain and read the prospectus (disclosure of investment information) before making your final decision on any investment. The basic objective of investing is to earn the maximum possible rate of return on the funds you have to invest, that is consistent with your goals, objectives, and tolerance for risk.