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Let Your Money Make Money

Photo by:   Fernando Padilla
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By Fernando Padilla - Pretmex


The most important principle that we all must understand is that money loses value over time. That is, today's money is not worth the same as yesterday’s, and more so in developing countries like Mexico, with their high levels of inflation. Therefore, one step that we all must look for in the management of our money or that of our business, is to always generate money above inflation. If we don’t, we are losing money.

Today, when a person has some money left over, or a company has a month of sales and has excess liquidity, the traditional model is almost always to save or protect it. The traditional model that we all know consists of putting your savings or excess liquidity in a bank account or, in the best of cases, in an investment fund, or even a bank note, where we will supposedly obtain a return or profit for having the money stored there. In the worst case, it is kept in cash in a safe deposit box or under the mattress.

In Mexico, however, these traditional alternatives are bad options, because they generate less than inflation and that, in reality, makes us lose money. Even in the traditional financial system, it is difficult for you to keep your money in a financial institution due to the commissions it charges you, making the option of leaving your money in the bank a bad financial decision (very safe and stable, but financially bad).

The financial model of banks consists of savers keeping their money in bank accounts and in turn putting it to work by lending it to companies, government and/or individuals; to those who charge a higher interest rate than the one they pay to the saver. But we know that, at least in Mexico, the interest charged to credit users (often very high, like with credit cards, from 45 percent up to 60 percent) does not reach the savers or depositors. Therefore, we must all have and know the alternatives to invest our money in different channels, where today there are many new alternatives.

The second principle that we must understand is that higher returns equal higher risk. Logically, it is much safer to have your money in a bank account because you have insurance against loss and banks have reserves, but that security has a cost, and that is the little or no return that your money has in a traditional account. Therefore, your money in a bank account is very safe, but it loses value over time. Yesterday's money is no longer worth what today's money is.

1. Stock Market, Stock Exchange, Shares, Bonds

Stock exchanges and investing in public stocks, bonds or similar instruments are quite known to most people, but are little used or experienced by most of them, firstly because many times the language, the type of investments or, in general, the forms tend to be sophisticated, using little-known terms, which drives most people away. On the other hand, although this is changing, to invest in these types of options, it would normally require a significant amount of money, limiting the possibility for most people to invest in these alternatives; and lastly, with the stock market, the vast majority of options tend to be volatile, which means that just as you can make money, you can also lose it. These three reasons are why few people actually actively invest in trading instruments.

But the world is changing, and new platforms are being born all the time that make the process of investing in these types of options easier, such as GBM+, which in addition to making it very easy, has a lot of information to take you by the hand in this option.

This type of investment is good as long as you understand that you always have to have a strategy, that you understand that you are not betting and normally my recommendation is that you always think in the long term and always start gradually.

2. Crowdfunding-Collective Funding

A crowdfunding platform wants to get the bank out of the equation and give savers the chance to lend directly to the people who need the money; in this way, the investor obtains better returns. This is achieved thanks to the fact that the interest rate that the person or company to whom you lend will be paid and transmitted to your account directly. That is, the financing gain is for the owner of the money while the platform will only charge a small percentage to administer this for you, similar to how Uber, Rappi and Mercado Libre work.

Collective funding – also known as peer to peer, crowdfunding or crowdlending platforms – is a model that mainly serves to put your money to work; that is, to invest and earn money.

This type of model, which has been aggressively promoted on social media and the internet, includes platforms that connect a person who needs money with someone who has money, removing the traditional model of a bank. They are models that are still little known, but that will penetrate the market more and more while traditional financial and banking models will be forced to adapt.

Within the collective funding platforms there are three main types:

- Those that pay you with money yield or interest and make your money work. The investment can be made in credits or loans with or without a guarantee, for projects, operating companies or for individuals. There is a model that instead of being paid interest, you participate in a percentage of the project or business, such as a real estate development or the acquisition of an asset for a company, and from this process of buying and selling or leasing, a profit is generated for the investor. This type of platform is ideal to invest your money and obtain short- and medium-term profits. Examples of these platforms are Lendera, which finances companies with a guarantee of their equipment and machinery, or Prestadero, a platform for loans between people, without guarantee.

- Capital for companies (equity). The money becomes part of the shares of a company; you are investing in a company so that in the future it generates profits and with that, it pays you, so it is a long-term investment. It is very similar to buying shares in the public market, but through a platform you get more local or more common companies, which although it seems more risky, you definitely have more return. An example of this type of platform is Snowball or Arkangeles.

- Exchange. These tend to be more of a donation or pre-purchase, which do not return money but a product, service, or something representative, such as a thank you letter or postcard. It can also be generated if you invest money for the development of a new product, you are practically buying the product at a discounted price, like a pre-purchase. An international example is Kickstarter.

In a collective funding model, the risk is that the person to whom you lend will not pay you, since there is no insurance, reserves and because you decide who to lend to, obviously you have greater risks, but at the same time, you have the opportunity to earn very good money, although you can also lose, but with a good strategy you will almost always win.

As for the risks in crowdfunding platforms, it is not a coin toss, since they evaluate, rate, determine the probability of payment of a person or company and give it a rating. If they pass the filters (their credit history is studied, as well as the income and payment capabilities), it is published on the platforms so that investors who want to put their money to work know the opportunities and risks that exist, but to be published on the platform they have an important filtering process. It is important to consider that the higher the risk, the better the rate they pay and the lower the risk, the lower the rate.

3. Cryptocurrency

Cryptocurrencies are nothing more than virtual assets, a digital asset, which can only be transferred electronically, and which were created as a means of payment or exchange of a good or service. Their technology (encrypted codes) makes it impossible for them to be corrupted or manipulated and they provide security in the transaction. Thousands of types of cryptocurrencies have been born around the world, the best known of which is Bitcoin, but there are also Ethereum, Ripple, Shiba, Dogecoin, among many more.

The most important points to understand is that there is no central bank or government that controls or regulates them, and they were created just to reduce cost, increase security and speed up the process of an international transaction.

Cryptocurrencies have advanced at a tremendous speed. Although most people are still unaware of them, this accelerated growth has made them fashionable and many people have begun to use them as an investment strategy, since their price is determined according to real supply and demand (not controlled by anyone), causing the price of these coins to increase. Many people buy these coins not so much for the purpose of using them as a means of payment, but to keep them, waiting for their price to rise, to then go out and sell them at a higher price.

This option has generated great gains for many, but also many losses for others, although the balance has been more gain than loss. It must be understood that they are still very volatile markets and that there is a lot of speculation, so although it is an investment option, I would go really slowly in this type of investment.

Tips For a Good Investment Strategy

To make a good investment strategy, regardless of the option or options you choose, there are four rules of thumb that you should always follow:

1. Don’t put 100 percent of your money in. No investment channel or option should hold your life savings, or 100 percent of your day-to-day money; it is not your checking account. These platforms serve so that part of that money that you have saved can be invested. Always have an investment strategy, for your surplus and your money, with one part always put it in the safest place, while using an important part to invest and to generate more money.

2. Research. To really generate money, investigate where you are going to invest, do not invest for fashion, or because it was the first thing you saw. Investigate where and in which place you will invest, who is behind it, how long they have been in the market, what their experience is, ask for references, and validate the information that you obtain directly with the platform. But invest in several options; you do not have to be only in one, since there are several types of companies (good and recognized) that have platforms. Once you have selected the platforms where you will invest, invest in the things that make sense to you, that you like, that won't worry you.

For collective funding platforms, always validate in the association of collective funding platforms, AFICO.org, since those that are affiliated there will give you some assurance that they are the safest and most serious on the market.

3. Diversify. The golden rule to always make money is to diversify. Choose at least three channels where to invest and in those three use different instruments or opportunities so that your money is well spread.

The word crowd means massive, so it is important that you spread your money, putting a small amount in each of the cases that attracts your attention to invest. The more cases and opportunities, the safer your investment will be and you will obtain positive returns.

4. Don’t panic. Some of your investments will not generate the expected return. You can even lose in some, but that is part of investing. For the same reason, it is important that you put your money to work in different projects that generate returns, and although some lose, others will win, and the diversified combination will always generate that in the end you win.

Obviously always do it according to your investment strategy, and in volatile instruments, such as the stock markets or cryptocurrencies, put an amount of money that you are willing to lose or set loss limits so that they are your sales generators, while in the crowdfunding platforms, which normally have fixed payments, the simple spread of investments will ensure your profit.

No matter which option you choose, the important thing is that you are clear that your money should work for you and not you for money. So don't delay and start investing.

Photo by:   Fernando Padilla

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