Although these words are usually used interchangeably, both savings and investment are critical elements of personal finance but serve different purposes and starting early is a great way to set yourself up for long-term financial stability. Some of the key differences run around the Time Horizon of the investment as well as the Risk Profile.
Investing involves putting money into assets that have a potential for growth or income. Its usually done for long-term goals, like retirement or wealth accumulation. It carries some level of risk, but potential returns are generally higher than those on savings.
Investing in Unit Trust Funds
Unit trust funds use money from multiple investors to purchase interest bearing financial assets in order to generate a return on investment. This return is earned daily and distributed to investors monthly.
These Funds are ideal for investors seeking to preserve their capital, low risk and highly liquid investments, offering a return that beats inflation and is higher than that of bank savings and call accounts.
Unit Trust Funds offer several benefits including withholding tax exemption, liquidity, and compound interest ensuring a relatively high return on your investment.
Risk Profile
Unit trust funds OR CISs are licensed and regulated by capital markets authority together with the appointed trustees and custodians that ensure that there is efficient management and administration of investors money, but most importantly, Unit Trust Funds invest primarily in short to long-term fixed income financial instruments, for example listed bonds and treasury bills, bank deposits, all of which are considered of low to medium risk.
Investing in Stocks
When you buy a stock, you're actually buying a small piece of ownership in a company. For example, if you buy a share of MTN, you become a part-owner of the MTN company. Stocks offer the potential for capital appreciation (when the value of the stock increases) and dividend income (when the company shares its profits with stockholders). However, stocks can be riskier and more volatile than other investments because they depend on the company's profitability and growth.
With stocks, you can make money in two ways: by selling them at a higher price than you bought them, and by receiving dividends. For example, if you bought a share of MTN at ugx 100 and later sold it for ugx 150, you would make a ugx 50 profit.
Another way to make money with stocks is through dividends, which are payments companies make to their shareholders from their profits. Not all companies issue dividends and the amount you receive may vary. So, in addition to the ugx 50 profits from the sale, you may also receive dividend income from your MTN shares, increasing your total return on investment.
Investing in Bonds
Bonds are a type of investment where you lend your money to a government or a corporation. In return, the issuer of the bond promises to pay you fixed interest payments and repay the principal at the end of the bond's term. Bonds typically offer lower risk and return compared to stocks, but they depend on the issuer's creditworthiness and interest rate changes.
You make money with bonds by receiving interest payments and getting your principal back at the end of the bond's term
The Importance of Diversification
If there is one phrase to perfectly describe diversification, then it is: don't put all your eggs in one basket. Diversification is a strategy to reduce risk and increase return by having a mix of different types of investments that are not highly correlated. In other words, when some investments in your portfolio are doing poorly, others might be doing well, which can help balance out your overall returns. To diversify your portfolio, you can either invest in a mix of stocks, bonds, and unit trust funds, or choose investments from different industries and sectors or include both domestic and international investments.
Take Control of Your Financial Future with Our Six Steps Financial Planning Process
We guide you through your financial planning process and stay with you to the end to ensure that it comes to fruition. Together, we examine your current situation in terms of incomes and expenses, your aspirations, the resources available (Income streams) and develop a plan to achieve your current and future financial goals. Our 6 steps of financial planning process will help you get a grip on your finances and ensure future financial independence.
Write your goals and define your priorities.
What's important and what you want out of life. For example, how much inflation adjusted income will you need in your retirement or if you became disabled or a family member dies prematurely where will the income come from.
Identify the goals as short term and long term and determine if each goal listed is either essential, important or an aspiration.
Essential goals; must do. Saving for retirement, building an emergency fund,
Important Goals; Less critical but represent core values eg. Education, saving for home, down payment on debt, starting a business.
Aspirational goals; Anything merely nice to have. E.g. Second home, second car, big trip.
Discover your financial position.
Collect data on your incomes, expenses, assets, liabilities and investments. We also discuss your positive and negative investment experiences to understand your perspective. This information will be used to create a comprehensive financial profile and identify areas of strength and weakness.
Analyze financial Data;
The data is analyzed to identify areas of improvement and potential financial risk. This includes evaluating your income streams, expense patterns, investment portfolio and debt management strategies.
Developing a financial Plan;
Based off of your goals and financial data analysis, a financial plan is developed. The plan typically includes a budget, savings and investment strategies, debt management strategies, and risk management strategies.
Implementing the Financial Plan
Take specific action steps to achieve the identified goals and objectives. These may include adjusting spending habits, increasing savings, investing in specific assets or paying off debt.
Review your goals and portfolio periodically.
Modify your goals as your life circumstances or timelines change