Investment and Saving Decisions - Essay Example

Investment and saving decisions Introduction This paper aims at discussing investment and saving decisions. It expounds on what investment entails defining it both economically and financially. It also focuses on discussing what saving is and what saving decision entails. In general, the paper seeks to unravel the myth of investment and saving decisions. Investment simply means an asset or item purchased with the hope of income generation or value appreciation within some time. Investment has two sides that can give angles of definition. In economics, investment is defined as the purchase of goods with an aim of not consuming them today but supplied in the future with a sole aim of wealth creation (Park 55). Investment definition from a financial point of view stipulates that it is any monetary asset purchased hoping that the asset shall yield returns with profit in the future. There is a hope of selling the asset in an appreciated price or higher price than it was purchased (Park 56). Good examples of investment in the economic view are building of a factory that will be used to produce goods and or going to college or university. In a financial point of view investment comes in the sense of bond purchases, stocks and real estate property (Hayes and Garvin 71). Investment is always confused with speculation, but the two words have clear cut differences. Investment is usually done with the aim of again or the aim of wealth creation. Speculation is often a flat transaction. Wealth does not form any part of the transaction. Even so, speculators are known to make informed decisions about their actions. The above factor denies speculation the privilege of being termed as traditional investing (Hayes and Garvin 71-72). Saving may bear different meaning to different people and at different forums. Some people believe that saving is putting money in the bank. There are those that believe that saving is buying stocks and bonds or contributing to a pension scheme. In the economic point of view, saving means a system of less consumption of recourses with an aim of future consumption. Therefore, saving is deferring consumption with an aim of storing and saving the deferred consumption for a future use (Hayes and Garvin 76-79). Saving and Investment Saving and investment are vital for the growth and development of a person’s financial stability. The two words are often confused to mean the same thing. Even so, the two words are related in a way or may make complete sense if they are used together (Hayes and Abernathy 66-67). A person may decide to save through investment. For instance, when a person has liquid cash that has no use at present hence; he or she decides to buy stocks, bond, or assets that will appreciate in future (Hayes and Abernathy 67). Consequently, a person can invest through saving. In such a case, that person assumes that putting money where it appreciates will yield added value in the long run. A person may invest by adding assets to the real stock of capital. It is very important to make money work for a person (Hayes and Abernathy 70). Saving is regarded as a short term way of storing money for emergencies or short term goals. On the other hand, investment requires more discipline and for longer periods. That way, a person will ensure that the investment grows his or her money in real terms (Carr and Tomkins 199). Investment helps an individual plan for significant events in life such as education and retirement plans. For a person to invest, he or she must have a saving plan, and for a person to save, he or she must have thought of an investment plan (Hayes and Abernathy 71-72). For instance, take an economy situation with a single commodity, say wheat, the amount of wheat available presently are either consumed or saved. Any saved wheat is planted (invested) with an aim and hope of more yields in future (Carr and Tomkins 210). In this way, saving adds to the stock of wheat in the ground as stock of capital. The amount of yields will depend on the amount of investment (Carr and Tomkins 210-212). Investment There are three major types of investment. Investment is purchased with money and expected to yield profits. The three basic investment groups are ownership, lending and cash equivalent. Examples of ownership investments are stocks, business, real estate, and precious objects. Stocks are literally certificate granting a person ownership of a company. All traded securities from the future to currency swaps fall under ownership investment (Drucker 55). Realization of profit will depend on how the market values what asset a person owns the right. For instance, if a person has shares in a company, such as Samsung, he or she is entitled to earn a profit on the shares if he or she sells the shares. Any money put towards starting or running an existing business is an investment (Drucker 55-57). Entrepreneurship falls under the most challenging forms of investment because it requires more than money to run. It is one of the most potentially returning ownership investments. Real estate investments are houses, apartments or dwelling units bought for the purpose of re-lending and reselling. Example of precious objects is gold and paintings. They fall under the ownership investment provided they are bought with an intention of selling them at a profit (Drucker 58). Lending investments give a person the opportunity of being the bank. They bear lower risks than ownership investment and give fewer returns. For example, a bond issued by a certain company will earn certain fixed returns whereas an investment of stock may double the returns in the same period (Drucker 59-62). On the other hand, stocks can lose heavily and make a company go bankrupt hence ownership investment is more risky. Owning a saving account is regarded as lending investment. A person is considered to be lending money to the bank. A savings account earns interest at a specific period. The risk of owning a savings account is almost nil because of the Federal Deposit Insurance Corporation (Park 57-58). Cash equivalent is investments that are certainly weighed in terms of cash. They may not be liquid cash, but they are easy to convert to cash. For example, the money market funds have very small returns but are regarded as a cash equivalent investment. Money market funds are regarded more liquid than any other cash equivalents (Park 58). Making an investment decision Several things are important to consider before making an investment decision. It is important to draw a personal financial system. Figuring out personal goals and the level of risk tolerance helps figure out a financial plan. Second step is to evaluate comfort zones that make an individual not take risks (kaplan 87). This is important because all investments involve some sense of risk. Taking an investment is risky but the positive rewards of risk are enormous. Strategic investment decision entails carrying on a positive process of identifying, evaluating, and choosing among different projects that have a future returns potential. It is very critical to get the decision right to minimize potential risks (kaplan 87-89). Before engaging in an investment decision, consider appropriate mixes of investments. Caution is important especially when investing heavily on shares belonging to employer’s stocks or any other individual stocks. When a person identifies an opportunity, creating an emergency fund service will be very vital to the investment (kaplan 90). The most crucial step towards making a sound investment decision is to avoid instances where fraud may be a resultant outcome. The time frame before the investment starts to yield returns should be considered before entering into an investment decision. An investment should not last for a long time, and its returns are very small (kaplan 91-92). Occasionally, many people fail because of not calculating the time frame before receiving returns in an investment. Always look forward to a forecasted profit returns from the investment. The last factor to consider is if the money put in the investment can generate more income if placed in another activity. It is important to make priorities in such a case. Saving decision Saving is influenced by three key elements. The first element is planning for the unexpected. Many people live with the fear of what may happen tomorrow. That fear drives people into saving some funds for the unexpected (kaplan 93-94). In a better term, this saving is for emergency purposes mostly. It is sufficient and secure enough to maintain a fund that can run a person six months and above in case that person is faced with financial stress. There are other forms of saving where people store money in terms of near money items. These are items that are easily converted to cash (kaplan 94-95). The second form of saving is when a person is saving to plan for the expected. There are three factors that will influence saving for the expected: near-term, mid-term, and long-term. The reason for saving via near-term is covering maintenance expenses for what a person possesses. A good example is for a person who owns a car; he may save for its maintenance. Saving for mid-term allows a person to pay for items that take a little longer before they are replaced. It may also for accomplishing goals set for not longer time in the future i.e. five years (Drucker 62). Saving for long-term involves saving for long placed goals. It is saving for later years. For instance, when a person starts a family, he or she will have kids. Saving for college funds for the kids is a long-term saving (Drucker 62). The third factor that will influence saving is planning for a person’s dreams. Saving enables a person to pursue dreams and desires in life. One of the ways through which people accomplish this saving method is by investing in the stock-based index funds (Carr and Tomkins 217). This saving scheme is regarded as a why saving scheme. The why saving scheme relies on the length of time a person sets forth for the dreams to come true. Goals that fall under five years may require a person to maintain a money market mutual fund (Carr and Tomkins 217). Conclusion Investing is done in order to have a gainful return in the future. On the other hand, saving is done in order to facilitate several factors. Saving can be for present or future. It is done due to fear of unknown, known or future dreams. Savings facilitate investment in a great proportion. There are ways a person can save money and on the same time invest that money. For instance, opening a saving account is a form of saving and investment. The two words mean different things but are closely tied. Making a sound investment decision will ensure that the money saved does not go into waste. Investment and savings decisions are a lifetime financial and economic situation that helps people overcome financial stress. Works cited Carr, C. and Tomkins, C. Strategic Investment Decisions: The Importance of SCM (A Comparative Analysis of 51 Case Studies in UK, US, and German Companies? Management Accounting Research, Vol. 7, pp. 199-217. (1996). Drucker, P. The Information Executives Truly Need, Harvard Business Review, Vol. 73, No. 1, pp. 55-62. (1995). Print. Hayes, R. and Abernathy, J. Managing Our Way to Econom-ic Decline. Harvard Business Review, July/August, pp. 66-77. (1980). Print. Hayes, R. and Garvin, D. Managing as if Tomorrow Mattered. Harvard Business Review, May/June, pp. 71-79. (1982). Print. Kaplan, R. Must CIM Be Justified by Faith Alone. Harvard Business Review, Vol. 64, No. 2, pp.87-95. (1986). Print. Parks, B. Rate of Return: The Poison Apple. Business Horizons, Vol. 36, No. 3; pp. 55-58. (1993). print Read More