Introduction
Over a few years, you have accumulated $100,000 that is currently sitting in a savings account earning very little interest. You have determined it is time to begin a structured approach to investing and need to allocate this $100,000. You have also determined you may have $1,000 a month additional to invest.
Part 1
Financial Planners
Financial planners are individuals within society that help people achieve their financial goals by creating long-term programs. A financial planner can provide people with general financial advice. However, they also have an opportunity to specialize in specific financial areas like taxes, retirement, investment, and real estate planning. I would consider hiring a financial planner since they help one in creating a structure that will be useful in future. Adhering to ethics is a crucial practice when dealing with financial planners because it helps them to build and nature trust with their clients. Trust is essential among individuals because it enables the client to adhere to the given financial plan when executing their roles and responsibilities.
Concept of Return on Investment
Return on investment (ROI) refers to a performance metric used to assess the level of profitability in a firm. In other instances, ROI helps to compare the efficiency achieved by different investments by comparing their profitability with investment cost (Thusini et al., 2022). I will consider using the return on investment framework when planning my future financial stability because it helps to evaluate whether the financial advice given by the financial planners is efficient. In addition, calculating ROI enables investors to evaluate whether any adjustments are needed to improve the productivity of a project. I can also use ROI to determine the most efficient investment based on its profitability within a given period and determine whether to focus on it or terminate others.
Explanation of risk versus reward related to your personal financial goals
Risks refer to the probability that an investment will incur losses. On the other hand, rewards refer to the value or the money that an investor accrues from an investment. There is no guarantee that an investment will be profitable, which shows that one must expect to involve themselves with risks or rewards.
Cost/Benefit Analysis
The cost-benefit analysis refers to a tool that helps investors compare two investment decisions to determine the potential costs and benefits associated with each approach (Jiang & Marggraf, 2021). The comparisons involved in this case are made based on monetary value. This helps the investors to make the right choices when determining which project is likely to be more profitable for them when making financial plans for their future.
Impact of Time Value for Money on Savings and Investments
The time value for money concept influences savings and investment in different ways depending on the ROI. The saved money is unlikely to generate significant revenue while investments might generate more income in the long term.
Interest Rates
Interest rate is the price of borrowing money from a financial institution. The interest rate is a crucial attribute because it affects the overall amount that an individual pays back after borrowing. If the interest rate is high, then it means that the loan will be costly.
Definition of “time value of money”
The term ‘time-value for money’ refers to the interim potential of money to generate revenue in future. Hence, the term is used to show that a certain sum of an amount will be worth more in future than its current value (Slobodnyak & Sidorov, 2022). Alternatively, the term ‘time-value for money can be used to show that a certain amount at hand at the moment will be less valuable in future because it will be denied an opportunity to earn interest.
Relationship between interest rates and time value of money
There is a relationship between interest rate and the time value of money. Interest rates ensure that the money paid back will have earned some additional amount. Hence, including an interest rate when borrowing helps in fulfilling the principles of the time-value for money because it ensures that the returned amount has not lost its value at the time of returning it to the lender.
Part 2
$100,000 that is currently sitting in a savings
The goal
The goal is to establish a structured financial investment using the $100,000 aimed at generating more returns than the benchmarked interest earned from the savings account. I will have already evaluated the ‘time-value for money’ acquired from the amount of cash stated above and determined that the current plan does not achieve the full potential of the money. Hence, the structured investment plan should target getting a higher reward than is currently achieved.
Time Frame
The preferred time frame for the preferred structured investment should be long-term given that there is an emergency fund to address all the emerging financial issues within the family. In addition, the cumulative amount does not in any way contribute to the sustainability of the family and all is spent. Hence, the amount should stay longer in the structured investment plan to attract a higher reward.
Risk Tolerance
My risk tolerance continuum is the above-average risk. This means that I am willing to risk losing some money to get a higher reward while making an investment. However, I’m also considerate of the amount I am willing to lose when pursuing better rewards, meaning that I cannot risk the entire amount. I understand that the ability to accommodate some risks will play an essential role in generating better rewards than the money is currently earning from the savings account.
Type of Investment
The types of investments that are convenient for my risk tolerance continuum are associated with some high risks. Examples of these investments include bonds, which attract outrageous returns. However, I should also be willing to make some significant losses. The stock market is another investment that attracts some risks but also attracts some chances of making losses. These plans have the ability to generate more income within a short period than leaving the money in a savings account.
Return at age 65-$100,000 that is currently sitting in a savings account
$100,000 that is currently sitting in a savings account
By the age of 65, the $100,000 will have been in the investment structure for about 40 years. Hence, the amount that I will have earned by this period is calculated as follows;
=$100,000 * (1.08) ^ 40
=$2,172,452.
Therefore, $100,000 that is currently sitting in a savings account will be =$2,172,452.
References
Jiang, W., & Marggraf, R. (2021). The Origin of Cost–Benefit Analysis: A Comparative View of France and the United States. Cost Effectiveness and Resource Allocation, 19(1). https://doi.org/10.1186/s12962-021-00330-3
Slobodnyak, I., & Sidorov, A. (2022). Time Value of Money Application for the Asymmetric Distribution of Payments and Facts of Economic Life. Journal of Risk and Financial Management, 15(12), 573. https://doi.org/10.3390/jrfm15120573
Thusini, S., Milenova, M., Nahabedian, N., Grey, B., Soukup, T., Chua, K.-C., & Henderson, C. (2022). The development of the concept of return-on-investment from large-scale quality improvement programmes in healthcare: an integrative systematic literature review. BMC Health Services Research, 22(1). https://doi.org/10.1186/s12913-022-08832-3