Investment Literacy That Pays Off – Part One

Feeling uncomfortable about investing? Today's financial markets offer a vast array of investment tools that can overwhelm inexperienced investors. A common mistake is to delay investing and let your money sit in bank accounts, whether current or savings. Before diving into researching the most suitable investment opportunities for you, it's advisable to start with an understanding of investment terms that may not surprise an experienced investor but can provide a basic orientation for beginners. Are you confident with your investment literacy? Remember, repetition is the mother of wisdom.

Financial Reserve

Recent years have shown us, in particular, how uncertain the times we live in are. Good times have been replaced by harder ones, in which we need to have deeper pockets ready. Therefore, an important aspect of managing your personal finances is building a financial reserve, which also has a positive effect on your overall psychological well-being.

The ideal approach is to have a short-term financial reserve to cover unexpectedly increased one-off expenses (such as broken appliances, energy arrears, etc.). This reserve should be equivalent to three months of your household expenses. Afterward, it is advisable to save a medium-term financial cushion for possible income shortfalls (such as unemployment, illness, or a downturn in business), which should ideally amount to 6 months’ worth of expenses. Savings in excess of this financial cushion can then be effectively invested in instruments that align with your investment objectives.

Principal

The concept of principal is primarily linked to lending rather than direct investing. However, when investing in loans secured by real estate, it is essential to understand this financial concept as well. Principal refers to the sum of money that has been lent to the borrower, which is repaid over time. The repayment of the principal itself is referred to as a mortgage, in addition to which the borrower usually pays interest or additional charges set by the lender. So, what does principal mean to investors?

You, as an investor, are entitled to a pro rata yield on your investment based on the principal of the loan. Regularly investing can increase your yields. At RONDA INVEST, we will typically pay you the invested amount at the end of the loan term. However, you will receive returns on the loan principal regularly. The more you invest, the higher the yields you will receive. In some cases, our borrowers may be so successful that they pay off part of the principal early, resulting in early returns for some of your investment.

But don’t be fooled. Such an initial investment can be as little as a thousand. Investing is not just for millionaires.

Liquidity

Yield, risk, and liquidity – these are the three pillars of the investment triangle. However, liquidity is often neglected compared to the much-discussed yield and risk factors. Liquidity is an indicator that shows how quickly an investment can be converted into cash or how easy it is to sell the investment. Therefore, you need to consider the period of time during which you won’t need the invested money – which brings us to another concept we will explain next, along with others.

Can you guess which terms are being discussed? If so, your investment literacy has passed the first test of adulthood. What other concepts are keeping you curious? Share them with us on our social media channels, and we’ll be happy to include them in future episodes.