When I started my first job, I was so ecstatic to have money in my bank account that was not a student loan. Somehow, I felt like my new money which I was to soon realize was not so much could buy all my dreams. I remember talking to a friend who was more experienced, and they would joke that I was young and did not need to save money for anything, I still had time and for a minute, I believed them. Bad advice that was but being a finance student, I did know it was bad, but I still wanted to revel in the euphoria that was in buying anything I wanted.
By then I was still living with a relative and paying rent was not a consideration I needed to think of. In fact, even transport was not part of my problems but soon, this ended and I got a reality check. The minute I moved out, I wished I had started saving, as the bills piled up, and I descended into short term loans that would leave a noticeable dent in my bank account. As they say, experience is the best teacher Slowly, I would start to dig myself out of this hole, but the journey is still ongoing and at first, it felt like I am too late, or the money is too little.
When saving for an activity that is a must-have, it is more prudent to decide a vehicle with low risks
While I haven’t reached millionaire status, my financial journey is far from over. The investment landscape is vast, offering everything from traditional savings groups (chamas) and real estate to complex options like mutual funds and government securities. Selecting the optimal investment strategy requires careful consideration of various factors. My investment decisions are guided by the following principles:
Purpose of the investment
Why you need to save money matters a lot? Let me use an example to explain this; if you need to save money for school fees, and your friend needs to save money for a holiday; I mean the kind that you just need because you need one and not for mental health purposes😊, your investment vehicles would vary greatly. While school fees are a necessity, holiday is a need that can be bypassed. School Fees does not come out of idle money in most cases, but holiday money might. When saving for an activity that is a must-have, it is more prudent to decide a vehicle with low risks that will likely give you some low returns but preserve your initial deposit. As for items that you can afford to not have, a medium-risk investment to high risk would work, since it would not hurt to take some risk here.
Duration
Some investments yield returns every month, quarterly, bi-yearly, and sometimes even yearly or daily. Depending on how long you want the investment to start yielding, you can choose an investment option that works for you based on that. However, be careful not to lose on compound interest (where interest earned interest too) by deciding payouts.
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Interest Type
Interest rates can be categorized in two primary ways: flat rate versus pro rata, and simple versus compound interest.
A flat interest rate applies a fixed percentage to the total amount at the end of a term, regardless of when the funds were deposited. In contrast, a pro rata rate calculates interest based on the deposit date, with earlier deposits earning more interest than later ones.
A flat interest rate applies a fixed percentage to the total amount at the end of a term. For instance, with a 10% flat rate, a deposit of 24,000 at the end of the year would earn a flat 10%, totalling 2,400. In contrast, a pro rata rate calculates interest based on the deposit date, with earlier deposits earning more interest than later ones.
Simple interest is calculated solely on the initial principal amount. Using the same example, a 10% simple interest rate on a 24,000 deposit would yield 2,400 in interest. Compound interest, however, considers both the principal and accumulated interest for subsequent interest calculations. A 10% interest rate compounded monthly on a 24,000 deposit would result in a higher return than simple interest due to the interest earning interest over time.
Funds available
The amount of cash available can limit where you invest it. Most investments have a minimum amount of investment, with shares and bonds having higher limits. Waiting to accumulate enough money to invest in these vehicles might be a bit hard. One can choose to invest in a vehicle where their available funds can reach and accumulate the money needed to invest in the bigger ones.
Risk Involved
This one goes without saying, your risk appetite determines where you put your money. If you are willing to risk losing your money, this translates to higher returns or higher losses. If you are more risk-averse, you can lose out on possible returns, but you are likely to also not lose your money. Most people decide to take a more balanced approach that guarantees moderate returns but doesn’t risk losing too much.
Options Available
Sometimes, one may want to invest in a certain vehicle, but it is just not an option due to various constraints. Available capital and the liquidity of an investment are big constraints and guiding factors. Rather than waiting until you can afford one, use what you can afford as a stepping stone. As for liquidity, the investment purpose should guide you to ensure you do not invest in long-term options when the goal is short-term, as this can lead to premature returns or even losses.
Investment company
The credibility of an investment largely depends on how credible the company offering it is. Doing a deep search of the company is key. With current advertisement mechanisms, it is advisable to go past the first Google page results and consult industry experts. Social media reviews also help, and asking the company representatives the right questions goes a long way. Proactively listening and following business, performances is also good as it ensures you still have information that may be retracted at some future time.
Cost
The cost of investment comes in many forms. The risk is not the only cost. Some key aspects people should check are management costs, withdrawal costs, insurance, tax, and brokerage. These are sometimes called hidden costs and may make the proposed interest rate appear higher than it is.
I am still learning from my mistakes and from those around me and while some times it feels like I am playing catch up, I am better than I was before
Rate of return
A high rate is attractive, but it is also true that not all that glitters is gold. It is prudent to look at how practical the rate being offered is. Most people have fallen into scams, multilevel marketing projects, or what is commonly called pyramid schemes and while they may offer returns at the start, eventually, you are more likely to lose more than you get. A conservative approach is to look at the government rates and bank rates and see how high the rate offered is compared to that. If it is too high, that rate is a red flag. If it is lower, it is also a huge concern.
I am still learning from my mistakes and from those around me and while some times it feels like I am playing catch up, I am better than I was before. I have learnt that no one ever knows everything and continuous empowerment is key. Ultimately, when it comes to investments, the rule of thumb remains, the riskier the investment the higher the return is likely to be, but no investment is going to give you out-of-the-world returns. Avoid get-rich-quick schemes, since everyone is out to make money, even those in these companies. Choosing the right one depends on who you are, what you need, what is available, and what is practically achievable.
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