These days, price increases seem to be everywhere – an extra 5 pesos here, 20 pesos there, a few hundred more on monthly expenses, and many more. These may look small at first, but over time, they add up and take a real toll on our wallets and bank accounts. Suddenly, “in this economy?!” jokes are feeling too real and less funny by the day.
It’s natural to start looking for ways to earn more and protect your finances during times like these. Investing often comes up as a smart option to help cushion the impact of rising daily costs. But before diving into all the concepts and numbers (and risk getting lost and overwhelmed), why not start with understanding the usual vocabulary used in investing? This is a good way to slowly navigate the exciting and potentially rewarding world of investments.
The importance of financial literacy
CIMB Bank Philippines, the country’s most awarded digital-only commercial bank, has long advocated for financial inclusion so Filipinos can live their purpose. Part of this is to encourage people to understand the many ways of growing their hard-earned money beyond the usual savings accounts, which is why the Bank supports efforts to educate Filipinos on the basics of investing.
Understanding key financial terms can help Filipinos make informed decisions to avoid costly mistakes, such as putting money into investments that don’t match their goals or are too risky for their taste. It also opens up more opportunities to build wealth through acquiring new knowledge.
What is an investment?
Before anything else, we need to understand – what does it mean to invest? According to Investopedia, an investment is an asset or item acquired with the goal of generating income over time. Unlike a regular savings account, which typically lets you earn money with more modest interest rates, investments have the potential to generate higher earnings – though they may also come with greater risk.
In the Philippines, beginners can explore a range of accessible options, such as time deposits, stocks, mutual funds, and even government-backed programs like Pag-IBIG MP2. Each option carries its own balance of risk and potential rewards.
Understanding risk and return
Risk is a pretty common word, but in finance, risk refers to the possibility that the actual results of an investment or decision may turn out differently, often less favorable than what was originally anticipated. Returns, on the other hand, refers to the gain or loss that an investment generates over time. This article teaches us that risk and return go hand-in-hand in investing. Low risk generally means lower expected return, while higher returns are usually accompanied by higher risk.
Diversification to manage risk
Now that you get the idea of risk and returns, another important term is diversification. This is described as a risk management strategy that creates a mix of various investments within a portfolio. This means spreading your investments across different assets instead of putting all your money into one. A common way to think about this is the saying “don’t put all your eggs in one basket,” so that if one investment performs badly, others may balance it out and lessen the blow of potential losses.
Another key factor: time horizon
Investing is not a get-rich-quick scheme – it can also take some time. An investment time horizon is the period you hold on to an investment to reach specific financial goals. This can be short-term, such as investments with the goal to save money for a vacation in the near future, or longer-term, such as investments intended for retirement decades down the line. Your time horizon often influences the type of investment that may be suitable for you.
Liquidity: having access to your money
The goal of an investment is to earn money and to eventually be able to use that money for other purposes. This is where a working knowledge of liquidity matters. Liquidity refers to how easy it is to convert an asset into cash without affecting its value. The more liquid an asset is, the easier and more efficient it is to turn it back to cash.
With a solid grasp of these basic terms, you’re better equipped to move on to studying the different investment options that align with your goals, risk appetite, and time horizon. This is a meaningful step towards making smarter financial decisions, helping you navigate your options with more confidence, avoid common money-making pitfalls, and start building a strong foundation for your financial future.
Starting one’s financial journey doesn’t have to be complicated. So go ahead, take that first step when you’re ready. Remember that small, informed steps today can lead to long-term wealth.