The first step to financial freedom and independence is saving a regular amount of money at regular intervals mostly on a monthly basis. However, the reward you will get by saving your money in a fixed deposit account will in most cases not compensate you enough to beat the prevailing inflation rates within the economy.
For instance as of December 2016, the average savings account interest rate in the US was 1.05% while the inflation rate stood at about 2.1%. With this disparity between the inflation rate and the savings account interest rates, your savings in the fixed deposit account were losing their value or what is referred to as the purchasing power by 1.05% on an annualized basis. In this case what appears to be a safe bet of saving your money with a commercial bank turns out to be eroding the value of your wealth over time. In order to protect your savings from such erosion of value over time, you should invest your money in investment channels that generate rates of return that are higher than inflation as explained below.
- Invest in mutual funds and unit trusts
Mutual fund and unit trusts are investment instruments made up of pools of funds from different investors that are used to invest in different asset classes and are managed by expert money managers. Due to the diversification nature of mutual funds and unit trusts; as well as the fact that they are managed by financial gurus, most of them record high returns annually ranging from about 3% to anywhere above 10%. In the case of 2016, a 3% rate of return would have ensured that your savings actually appreciated in value by 0.9% compared to a loss of 1.05% if you left them in a savings account.
- Online trading of binary options
With online trading of binary options, all you need is to have an online trading account, an internet connection and market knowledge of trends for the specific asset classes you want to trade on. Studying the market to understand its dynamics and the patterns that each of your selected asset classes are forming will help you to derive your winning binary options strategy that will keep you a head of the game at all times. Getting your trend predictions wrong can be a high risk undertaking resulting to a huge loss; but when you take time to develop a plan on how you will execute your trades, the returns can be consistently super normal.
- Invest in index funds
Closely related with mutual funds described above are index funds. An index fund has all the characteristic of a mutual fund in terms of pooling of funds from different investors and then having expert fund managers invest it in a diversified portfolio. However, for an index fund, the portfolio is structured in manner that it tracks the components of a given market index such as the S&P 500. In this case, the stocks being invested in under the index fund will be picked to match the individual stocks making up the S&P 500. This is done with the hope of picking the best stocks and recording higher returns than the overall market rate of return in a given year. If you invested your savings in the Vanguard 500 Index Fund for the past 3 years, your returns could have been 11% for the 3 years and 15.27% in 2016. The returns here are way above the 2.1% inflation and your savings would have grown tremendously.
- Invest directly in the stock market
Mutual funds, unit trusts, online binary options trading and index funds all give you an opportunity to invest in the stock market and other asset classes indirectly. However, you can choose to invest directly in the stock market through your stock broker without having to go through the mutual funds and paying them management fees. This calls for higher market knowledge about how the stock market operates and an understanding of the fundamentals of the different stocks listed in the market. Short-term trading in the stock market can be lucrative for professionals. However, for individual investors with just general market knowledge, choosing a dividend paying growth stock and sticking with it over the long-run gives you higher return with lesser daily involvement in trading.
Your options are obviously not limited and you should not tie down your savings to a fixed deposit account that erodes the value of your money in the long-run. Instead, be willing to take in a little more risk and choose from among the 4 investment channels explained above in order to earn rates of returns that are higher than the inflation rate at any given time.
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