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Money is something that almost always feels like it’s much easier to spend than to earn, but of course there are ways to minimise our spending and maximise our earnings. One of the most powerful forces in the universe is said to be compound interest, and it’s a great way to make your money work for you rather than having to toil for that money. How can you make your money work better for you, and what are some simple investing strategies that can help you meet savings and/or investment goals? The Time Value of Money A $20 note was worth $20 in the past, and it will be worth $20 in the future, at face value. What is the real value of that $20 now and in the future? Well, another old saying is that a bird in hand is worth two in the bush. It’s better to have that money now than to have a little more in the future. The money can be put to good use right now, whereas the “two birds in the bush” aren’t yours and can’t be put to good use. Money will be worth less in the future, perhaps not at face value but in real terms. Inflation is a perfect example that many of us feel in recent years. That $20 note doesn’t stretch as far as it used to. Go back to the 1950s, for example, and that $20 could buy you an awful lot. In finance, the time value of money reflects how money’s value erodes over time. The present value of money (say $20) can be put to good use now, such as in an investment savings account or in stocks, bonds, or other instruments. Because the future value of that same amount of money is lower (in real terms), there has to be an incentive to save. Doing so always comes with some risk, however, so that risk gets baked into interest, which can accrue over time. In other words, money promised to you in the future should always be worth more than that same amount of money today. By how much is where we get interest from, and it varies from asset to asset and instrument to instrument. How Can You Make Your Money Work for You? With this rudimentary explanation of the present, future, and time value of money and interest out of the way, you can probably imagine that making your money work for you will involve maximising your returns in the future. What does this mean, exactly? Should you look for the absolute highest interest returns? High interest means high potential returns, yes, but it also means high risk, and you could see your investments vanish. On the other hand, low-interest instruments (like many government bonds) won’t make you rich overnight, but they are almost always much less risky. In the case of bonds, they are backed by the solvency of the Australian Government (or whichever foreign government bond you purchase, e.g. American T-bills), so they tend to be much safer. Likewise, “blue chip” stocks and index funds tend to be quite safe. You’re investing in either a reputable and established corporation (blue chips), or you’re buying into a diversified “bundle” of stocks (index funds).  Taste for Risk and Finding What’s Right for You
High-risk investments tend to be attractive for younger investors who can bear the potential of losing in a downturn because they have many good working years left to recover and try again. Low-risk investments tend to be better for older individuals approaching or at retirement, because they simply cannot afford to take such a loss. These are all quite general, and making your money work for you always requires careful consideration of your risk appetite. Diversifying your investments and maximising your potential yields whilst minimising risk is ultimately a personal question. A reputable wealth management firm can assist you with these and help you achieve a realistic plan for your personal finances. Davlin Wealth Management Schedule a consultation with us at Davlin Wealth Management. Comments are closed.
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