At this point in history it is clear that, unfortunately, money does not grow on trees. On the contrary, getting hold of large sums of money can become a complex process. One of the ways to multiply money and achieve financial success is through investment, it is for this reason that making sound investment decisions should be one of the first things necessary to learn in life.
But what really is financial success?
So that financial success does not become a utopia, it is important to define what is meant by financial success, because unlike what many think, it is not about being a millionaire.
Financial success is a series of continuous actions that allow for a balance between the income received, lifestyle and quality of life. Patience and consistency are keys to achieving financial success, as the road can seem long and difficult. However, one of the most relevant factors is the will, because it becomes necessary to change the mentality of spending, for that of investing.
That is why investing is one of the main aspects of personal finance, because it allows you to maintain purchasing power, and even increase it in the long term. However, to invest the first step is to save and plan.
Before the investment: Develop a financial plan!
A goal without a plan is like a car without an engine. With financial goals, having a strategy becomes even more important, since saving or investing can become frustrating if there is no clarity on how to achieve it.
A financial plan begins by identifying and quantifying the financial resources available, and becomes a powerful tool with which it is possible to face expenses, and also allocate capital to save and invest. Financial plans can be carried out at a personal or business level, and require constant evaluation in order to make the right decisions according to current information, and the goals set for the short, medium and long term.
What steps must be followed to develop a financial plan?
Current Status Review
The components of a financial plan are usually: income and expenses. Revenues are money inflows; while expenses are outputs. The expenses can be derived from everything that is required to generate the income, or they can be associated with maintenance and fulfillment of the needs.
Extracting all the information to be clear about the panorama of monthly income and expenses is the first step in developing a financial plan. This makes it possible to identify what the main sources of income are and how they are being spent.
A very useful recommendation to carry out this exercise is to classify the expenses, some of the most used categories are:
- Monthly fixed expenses: for example, the payment of services, payment of debts or loans.
- Occasional expenses: these are expenses that are not made on a monthly basis, but that do have a periodicity, for example, annual renewals of a service or membership.
- Unscheduled expenses: are those that arise from unforeseen events.
- Ant expenses: they do not arise from any unforeseen event, nor are they periodic. They are usually impulsive or for pleasure, such as buying tickets for a concert, sweets, among others.
Once all the information is collected and organized, it is possible to start carrying out actions that help reduce expenses.
Define an economic goal
The goal may be to save or invest. If the objective is to save, it is important to specify what you want to save for, because this will determine the goal you want to achieve at a monetary level.
If the objective is to invest, other objectives are also derived, such as how much profitability you want to achieve and in what period of time in order to determine what the goal in money is.
Plan and stick to the plan
With the above information, the next step is to create a plan that allows you to reduce expenses, in order to achieve the stated economic objective, with current income. Here begins the most complex part, and that is to respect and stick to the plan. This will allow you to meet the objective, as well as obtain greater satisfaction and peace of mind when investing.
Now that the plan is ready, what is the next step?
Identify the investor profile
As the popular saying goes: “each one, with each one”. This means that there are investment products according to the investor profile of each person. The investor's profile determines the amount and type of risks that are willing to take; but there are also other factors that come into play to identify the investor's profile, some of the most relevant are:
- Age and stage of life you are in
- Income and savings capacity
- financial responsibilities
- financial knowledge
- Investment type of interest
- Desired profitability and expected time
With these characteristics, the types of investor profiles are defined. There are three that are usually the most used:
Bold or aggressive investor
It is a profile that is usually associated with young people, because they are not afraid of risks and seek the highest possible return. Generally, they are usually single, between 30 and 40 years old, and economically solid; for this reason they have enough solvency to invest in products that offer the highest profit.
They prefer investment portfolios in which they combine equity funds, short-term debt and long-term debt, shares of companies in the capital market or raw materials.
moderate investor
He is a balanced profile, he is willing to take risks when necessary, but he is cautious when making decisions. You want to maximize your profits, while maintaining a balance between security and profitability; For this reason, he is not afraid to take some losses, as long as it increases his chances of additional returns.
They are usually parents, with stable income and moderate savings capacity. In general, they prefer a combination of debt instruments (bonds) and equity funds, the latter to a lesser extent.
conservative investor
This profile avoids risks at all costs. Their wealth grows at a much slower rate, because they seek more stable earnings that do not put their savings at risk. It is common for this profile to be associated with retired people, however, anyone can be a conservative investor, since people who do not have very high incomes also opt for this alternative.
Although they prefer to avoid risks, sometimes this type of investor can lose performance if inflation is not taken into account.
The types of products are usually those where they can know from the first moment the profitability they will have, that is why they usually choose debt securities, term deposits or savings accounts. Your portfolio is typically split between 70% equity in a debt fund and 30% equity in a hedge fund.
If you want to maximize capital or obtain extra income thanks to the investment, this type of investment is not the most recommended.
How to choose the right investment instrument?
To invest there are endless options, this is positive because it is possible to find the investment that best suits the investor's profile. On the other hand, it also adds an additional level of complexity because with so many options, the risk of making a wrong decision is greater.
For this reason, the first thing to make the right investment decisions is to find out about each of the available investment instruments. Identifying the investor's profile can already give a clear idea about the type of instrument to choose; however, the main aspects that must be taken into account are:
- Amount available to invest
- Desired return
- Degree of risk willing to assume
- The term in which you want to obtain the profits.
The capital market a wise investment decision
Moving away from traditional instruments such as time deposits can be considered risky, or even complex or unknown. However, it is an option that allows you to obtain a much more attractive return, and that offers other benefits such as the possibility of choosing the type of investment you want, since the investment alternatives are varied and with a guarantee of fairness, transparency and equality. of opportunities.
The capital market, also known as the stock market, is the place where company securities are traded, with different levels of risk, which depend on whether it is an investment of:
fixed income
This type of investment is preferred by the conservative investor profile. The rent is fixed because it promises a reward that depends on the agreed interest and time. To make a fixed income investment, debt securities are acquired.
equities
Bold investors tend to choose this type of investment, it does not promise a reward which can mean a great risk, but also a great profit. This investment materializes through the acquisition of shares of a company. The performance is obtained by investing in shares of companies that promise amazing growth.
derivatives
They are agreements to buy and sell financial assets on a specific date and price, and their value is derived from the price of another asset.
That is, you can buy a security that is tied to the price of oil. If the price of the asset goes up, so does the investment.
Other considerations that must be taken into account to make sound investment decisions in the capital market
In general, the capital market has financial specialists who can guide people to make sound investment decisions. However, it is important to be familiar with the main terms that are used, in order to have greater clarity about the type of transactions that are being carried out, and what are the implications of each one.
investment liquidity
It refers to the quality of the assets to be converted into cash, without this affecting its value. Time is an important element for the liquidity factor of the investment, therefore, there are investment instruments with different types of liquidity.
Payment of intermediate flows
There are investment instruments that pay intermediate flows, others at the end, and some may even be unknown.
When making the investment, it is important to consider when you want or need to receive cash flows.
Market access
Depending on the type of market, there are restrictions for transactions with financial instruments. In other words, it is important to understand what the possibilities are to buy or sell in the primary and secondary markets.
value units
Investment instruments may be expressed in different value units such as UF, IPC, US$, among others. Depending on the investment objective, it is possible that some investors prefer instruments in dollars, or in other units of value.
Investment taxation
There are some financial instruments in which earnings may be affected by taxes; either because it is necessary to pay a tax, or because the yield generates tax benefits.
Investing is a habit for financial success
Investing and saving is a habit that requires a lot of discipline and will, however, its benefits translate into financial success and, therefore, peace of mind and economic stability.
Working with money and making it grow is also a way to ensure retirement and family well-being. Therefore, the invitation is to begin as soon as possible to change the mentality of spending, to one of saving and investment.
This applies to both the personal and business spheres. In the capital market and in investment instruments, there is a great opportunity for business; For this reason, everything seen above can be taken on a large scale for the increase of capital and equity.
Diversifying your investment, seeking advice and training from financial experts, as well as entering the capital market, is the best way to start making the right investment decisions.
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