Of all the questions we must ask about investing, perhaps the easiest place to start is “What do I do with my savings?” When comparing investment types, a good reference point is a savings account with monthly compounded interest; how well can the investment perform against a savings account? To extend this, we use a set of standardised metrics to understand the benefits of each investment type:
Equivalent monthly compound interest rate p.a. (i.e. comparison to savings account).
Payback period - how long do you go without your capital, before it is fully returned to you.
Return on investment - what is the % increase of your capital.
Take a look at the investment calculators below to understand what they mean and how you can calculate the benefits based on your situation.
Within a ‘lending market’, you offer to sell your capital to someone who wants to borrow it and repay you with interest over a certain number of years. This is effectively the same model as a home mortgage or car loan etc, except you are the lender.
Each month you receive a fixed amount returned to you by the borrower, which will include both principal and interest components. With these amounts you receive each month you can either: do nothing (not advised), re-invest into more P2P loans, re-invest into savings account, or invest elsewhere. There are trade-offs between each option which you won’t fully know until you run the calculations.
They come in many names and formats: actively managed (a.k.a mutual, 401k, superannuation), index (i.e. passively managed), and can be bought directly or through an ETF (Exchange Traded Fund), however at a high level they are all the same.
You give up capital to buy shares in a fund. The fund manager buys shares in various markets in hopes of having growth in share value and income from dividends (depending on the fund), which could be: US companies, large companies, small companies, real estate, international companies etc.
There’s a few variables to consider when finding out which fund is best for you, including what was the performance over the last 3, 5, 10, 20 years, and what are the fees, especially management fees. Even a difference of a fraction of a % in management fee can make a big difference to the overall returns to you, especially over the long term.
In many developed countries and especially during boom periods, the ‘go to’ for investors has been property. “Buy a house, you can’t go wrong people say”, this may work out well, but it’s important to realise that the level of success you can achieve is dependent on many factors, e.g. mortgage size, property growth, rental growth, fees etc.
If you want to own your own home for lifestyle choices that’s also another consideration but the trade-off is lack of flexibility (you need to keep a job to pay the mortgage) and it’s a low-liquidity asset (it can take a while to sell if you need the cash). With a property you live in (as opposed to renting-out) this may reduce living costs, which ties back to the question "Should I rent or buy?".
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