What allows us to compound our money by getting a return on it. Why is the bank willing to pay us for keeping our money there? What determines whether an investment will provide a return?

This section looks at why we can gain a return on money and therefore compound it to larger sums. It looks at the two main ways for savers (as providers of capital) to interact with users of capital (like companies and governments) who might pay us a return to give them the money for some time.

The first way that we can make our money available is through debt – we can lend money to users of capital and they usually pay a return in the form of interest. The second very common way of compounding our money is through equity or ownership, and our return corresponds to that of an owner or a part owner of a business.

The section details how we can increase our rate of return at the bank, and provides simple examples of how debt and equity work. It concludes by detialing how the financial markets play a role in bringing providers and users of capital together.

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INVESTMENTS

Investments are the tools that help make our money grow. Two key investments involve making our money available to users of capital in the form of equity and debt - these will looked at in more detail. There are also other types of investments including real estate and commodities and even art - these will also be looked at in this section.

DEBT AND BONDS (FIXED INCOME INVESTMENTS)

The first way that we as savers can interact with users of capital who are looking for funds to grow their business or to undertake a project is through debt – we can effectively lend them money. Our return depends on the ability and willingness of the other party to pay us a return, usually in the form of interest.

In this section we will look at debt investment including bonds in more detail – who issues them, what kinds are there, what affect their price and how we should we should think about them as investments.

EQUITY AND STOCKS

The second way that we as savers can interact with users of capital is via equity (which includes stock investments), where we become owners or part owners of companies.

In this section we will look at equity in more detail, including private equity, as well as the equity of companies that has been listed on the stock exchanges of the world. We will look at how this works, what the terms mean, what indices are, and what the factors affect valuation and price.

MUTUAL FUNDS OR UNIT TRUSTS

Funds can provide a way of investing in many investments at once, and often also involve having a professional take the investment decisions.

For many of us investing in funds where a professional takes the investment decisions probably makes sense. But there are numerous considerations to bear in mind – some funds never perform well, some funds have higher expenses than others and some funds just replicate an index.

In this section we will look at what these funds are, what the important characteristics are of the funds, what fund mangers do, what works and how we should think about investing in funds.

HEDGE FUNDS

Hedge funds have been spoken about in the press a lot, and for some investors they are a very attractive alternative to mutual funds.

In this section we look at what hedge funds are, how they make money and how we should think about investing in them.

REAL ESTATE

Real estate can be one of greatest sources of wealth; in fact, in many countries, the government incentivises us to buy at lesat some real estate (for example a home).

This section looks at different types of real estate investments, what we should think about when we are trying to figure out whether real estate prices are likely to rise or fall, what the risks are, how the government incentivises home ownership, as well as factors that determine the price of real estate.

COMMODITIES

Commodities such as oil, metals and agricultural products have some very interesting investment properties.

This section looks at what drives commodity prices and why they can be a very interesting addition to an investment portfolio.

OTHER INVESTMENTS

In theory we could invest in anything. An investment becomes an investment if people buy it and make money over longer periods of time. One thing to bear in mind for some investments is that if it looks to good to be true, then it just might be.

In this section we look at capital guaranteed products that offer a return with downside protection. Also, we look at art and other collectibles as investments, what the differences are between these investments and others that we have spoken about, and how we should think about them.

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THE ECONOMY

The economy affects how investments behave, the prices of goods that we purchase, unemployment; not to mention that the subject is poken about in the press every day.

In this section we will learn about the role the economy plays, what the central bank does, what pieces of data are looked at and how economic cycles work. We also look at the impact of the economy on different investments.

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SAVING AND INVESTING IN PRACTICE

Knowing about the saving concepts and the different investments is powerful, and in fact is what helps us understand so much of the world around us. In order to put all of this into practice, there are a few more things that are important and that we need to learn about. These include:

THE IMPACT OF TIME

Some investments are expected to have a higher average return over the long term, but the return in any one-year can be very volatile. Looking at returns over different time periods allows some very interesting concusions to be drawn. It also has huge implications as to which investments are suitable when and for whom.

TIMING INVESTMENTS AND DOLLAR COST AVERAGING

There are many psychological factors that affect how we invest and many of them lead to making poor investment decisions – even for smart people. Just look at bubbles that happen over and over again.

In this section we look at some of the mental processes that go on, bubbles that have taken place in history and how we can avoid falling into some of the traps that exist and that even smart people can be caught off-guard by. We will also talk about how we can get the average price for our investments down and how to avoid falling into some psychological traps.

TAXES AND COMPOUNDING

Governments in developed countries want us to save for our retirement and they want us to get wealthier. Furthermore, the financial system relies on savers to make funds available for companies to be created and for governments to function.

Because of the role that savers play, the fact that the financial system is so important and because the government does not want masses of older people begging for money, there are numerous incentives that governments provide for us to save and invest our money. Being able to save tax in a legal and government-endorsed manner makes a huge difference in how much we end up with.

DIVERSIFICATION

By mixing assets that go up over the long term, but that do not move perfectly together over shorter time periods, we can often increase returns for a given level of risk, or decrease risk while giving up very little return. This is pretty important especially if we want to avoid a catastrophic loss.

TRANSACTION COSTS

When we buy investments, sell investment or hold investments, there are often costs involved. Any cost will take away from our return, and as we saw in the section on compounding, what might seem like a relatively small difference in the return per year, can make a very large difference over the long term.

The key is to understand what these costs are, which ones are justified and then to eliminate the unnecessary const and reduce the others where it makes sense.

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GETTING STARTED

Sticking to any investment plan takes a bit of thought, some action and the ability to stick with it. Fortunately it is not difficult and if we have the knowledge - we won’t be taking random actions based on misunderstandings.

In this section we will look at some final tips as we set off on the road of saving and investing and towards financial freedom.

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