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Investments

Investment Vehicles

Savings versus Investments

When you establish a savings plan, it is important to recognise the difference between savings and investments.

The savings account provides a fund that is available to meet short-term needs or to provide money quickly in the event of a financial emergency. Because of the short time horizon, the primary savings criteria should be safety and liquidity.

In comparison with savings, investment objectives have a longer time horizon. The money that you invest should be money for which there is no immediate need. In other words, investment capital should be money that you can live without for a long time.

The need to save

People save for many reasons. One of the primary purposes of savings is to provide an emergency fund for an unexpected illness, a sudden expense, or a period of unemployment. An emergency fund can be a real life-saver when you incur unexpected expenses.

People also save to accumulate money for a specific purpose, such as to buy a car or to put down a deposit on a house. an emergency fund can also be seen as a part of risk management.

An appropriate savings principle is to pay yourself first. This means that you must pay your savings account first before you pay  any bills or obligations. You must establish a savings habit, and the easiest way to achieve this is to start a contractual  savings plan.

Investments

You have to consider the following factors before you decide on any specific investment vehicle.

The term of investment

You must decide on the term over which the money will be invested, because it will pay a major role in the type of investment that will suit that specific purpose. For example, if you want an emergency fund, life assurance (which has a minimum term of five years) will not be suitable.

Liquidity needs

If liquidity is a requirement, then it will be foolish to use a long-term investment channel.

The need for regular income

If a client needs income from the investment, a single-premium life policy will not satisfy the identified needs. A money market unit trust, term annuity or life annuity may be a better solution.

If a client gets sufficient income from other sources, a financial planner can use investments that are aimed at maximizing capital growth. This is an effective way to protect the buying power of the capital against the eroding effect of inflation.

Tax

A client would want to pay as little as possible. Therefore, it is important that you compare the expected after-tax rate of return on the investment.

Dependants

If more than one person depends on your financial skills and the income that you can generate from the investment, the opportunity for you to take risks might be limited.

Financially informed investor

If you are an informed investor, your client will know that the financial risks will automatically be smaller. Knowledgeable investors do the necessary research to ensure that they invest their clients' money in vehicles that fit their clients' risk profiles.

Health

A healthy person can afford to take more risks in terms of their level of cover than an unhealthy person.

Age

A client's age will determine whether you will be able to recover losses. A young person can take greater risks to increase his or her wealth than an older person.

Risk profiles of particular investments

Every type of investment carries a risk profile. These profiles must be matched to the client's profile to ensure that the client  will receive what he or she wants.