In some of the training sessions that I run, I usually ask my audience why someone would like to invest, especially in the stock market. The answer usually is, “To make a lot of money” and “to make the money quick.” And when I ask “How much is a lot of money?” this is usually followed by incoherent mutterings, which clearly shows that although people want to make money, they do not have an answer as to the amount that is “a lot of money.” However, to use the analogy of bodily exercise, you cannot walk into a gym and squat 500 times on the first day and expect to lose 10 kilogrammes. In other words, your introduction to investing should follow the same incremental process that weight training follows.
Reasons for investing
Typically people invest for various reasons. These range from paying for children’s education through to university, ensuring a stable income for retirement, to just meeting certain financial objectives. Whatever the case, having investment goals is key to deciding whether to invest or not.
There are two main reasons for investment:
(a) For retirement: It is very difficult to imagine retirement when one is actively employed or even when self-employed. The truth, however, is that sometime in the future, your strength will wane and you will not make as much money as you did in your younger days. Many countries have social security or retirement schemes which endeavour to force individuals to invest for retirement. In our country (Kenya), employers are required to make social security contributions for their employees. However, for the self-employed, saving for retirement is an option. It is advisable to join a retirement saving scheme if you are not yet in one. The important thing here’s to ensure the amount you invest is able to contribute to your to your upkeep for at least 10-15 years after retirement.
(b) Achieving financial goals: Unlike investing for retirement which is long-term goal, the second reason for investing is both a long and short term goal. However, in this case, it is important that you set your goals before you start to invest. The goal could be to increase employment income, go on a holiday, or buy a new car. Depending on the goal, the investment can be either long or short term.
See the future; it always comes
Just as there are two main reasons to invest, there are two main reasons not to invest. These are:
(a) Debt: There are different kinds and sources of debts – credit cards, mortgages, “shylocks” and bank loans among others; they each carry different degrees of weight when you are making investment decisions. For example, with regard to a bank loan, such a decision could be reached by simple calculation. Imagine that you have a Kshs 100,000 loan at 12 percent interest, and that you get a Kshs 100,000 bonus. Should you invest the bonus or should you pay down the debt? A straightforward answer is: pay down the debt. If your option is to invest it, then the money has to make a return of well over 12 percent to make it worthwhile (note that the returns must be over 12 percent because this computation does not take into account commissions and bank fees in respect of the loan). It is much easier to find good returns on investment without having to fight losses on your debt.
(b) Lack of Knowledge: Throwing your money haphazardly into investments that you do not understand is a sure way to lose it quickly.
Saving to invest
Remember the old story about the grasshopper and the ant? The grasshopper did nothing but play and sing, while the ant toiled and saved. The grasshopper thought the ant was dull and boring for never taking the time to have fun. The ant on the other hand thought the grasshopper was silly and stupid for not planning for his future. Sure enough, when the weather got colder and all playing, singing, toiling and saving stopped, the grasshopper was left out in the cold with nothing, while the ant was snug in his well planned retirement home.
In reality, people generally have a combination of both ant and grasshopper traits. While having fun keeps life from getting dull and boring, saving for the future is part of a wise life plan. And when the economic situation is uncertain, saving for the future is more important than ever.
Dr. Lynn B. White, Texas Cooperative Extension family economics specialist, lists four general reasons for saving money:
(a) Emergency fund to prevent personal financial crises;
(b) Revolving savings to cover the cost of ‘now and then’ expenses such as insurance premiums, property taxes, gifts and other infrequent and/or unexpected payments;
(c) Short-term goals to cover the cost of items purchased or events planned during the next 12 to 24 months; and,
(d) Retirement/long-term goals; the earlier we start we saving for these goals, the less we have to save for saving each from our salaries. (It is never too early to start saving for retirement, education of children, major purchases, say for a new home or vehicle.)
To start saving money begin by looking a things you buy weekly and monthly. Simple changes in these regular expenses can add up to funds for saving. For example, one less soft drink at Kshs15 for 52 weeks a year adds up to Kshs750 a year.
Other little changes can yield big savings, say changing brands, and choosing more economical packaging and sizes of these products, as well as using a little less. These could add up to more than you might think. Start by saving Kshs70 the first time for 52 weeks. That may look little, but it is sufficient to purchase shares at the Nairobi Stock Exchange.
A shilling here and a shilling there.
For additional savings possibilities, look at monthly expenses such as utility bills, car payments, housing costs and credit cards. Look for services you pay for and do not use or those that would not have a large impact on your life if you stopped to use them, such as extra TV channels and phone services, more expensive housing, and so on.
Next, look at the amount of money you spend on gifts and special occasions. About how much did you pay for these last year? Could you meet your needs and spend less this year? Subject the amount of this year’s projected expenses from last year’s total, and put that amount in savings. Then divide the projected amount to be spent by 12 (or by the number of salary payments per year) and put that amount in savings each month to cover revolving expenses. When these expenses occur, draw out the amount needed. If you are able to find choices that save even more, leave the extra savings as a cushion for those times when expenses may be a little more than expected.
As goals are reached and new ones are set, think of the fact that you have become accustomed to meeting daily living expenses with this amount of money going into savings. Continue to save it! Let someone in the family keep track of your savings cushion and report it when you meet to plan coming events. You may be able to do something special together as a family or have a head start towards a new goal.
Conclusion
Your reasons for investing are bound to change as you go through the ups and downs of life. This is an important process because the only other option is to invest with no purpose, which will likely result in investing practices that reflect your uncertainty and cause your returns to suffer. Your reasons and goals will have to be reviewed and adjusted as your circumstances change. Even if nothing significant has changed, if is always helpful to reacquaint yourself with your reasons at regular intervals to see how you have progressed. Like running on a treadmill, investing gets easier and easier once you start.
Reflection/Action
Would you rather spend your tomorrow today or save today and spend it tomorrow?
Reasons for investing
Typically people invest for various reasons. These range from paying for children’s education through to university, ensuring a stable income for retirement, to just meeting certain financial objectives. Whatever the case, having investment goals is key to deciding whether to invest or not.
There are two main reasons for investment:
(a) For retirement: It is very difficult to imagine retirement when one is actively employed or even when self-employed. The truth, however, is that sometime in the future, your strength will wane and you will not make as much money as you did in your younger days. Many countries have social security or retirement schemes which endeavour to force individuals to invest for retirement. In our country (Kenya), employers are required to make social security contributions for their employees. However, for the self-employed, saving for retirement is an option. It is advisable to join a retirement saving scheme if you are not yet in one. The important thing here’s to ensure the amount you invest is able to contribute to your to your upkeep for at least 10-15 years after retirement.
(b) Achieving financial goals: Unlike investing for retirement which is long-term goal, the second reason for investing is both a long and short term goal. However, in this case, it is important that you set your goals before you start to invest. The goal could be to increase employment income, go on a holiday, or buy a new car. Depending on the goal, the investment can be either long or short term.
See the future; it always comes
Just as there are two main reasons to invest, there are two main reasons not to invest. These are:
(a) Debt: There are different kinds and sources of debts – credit cards, mortgages, “shylocks” and bank loans among others; they each carry different degrees of weight when you are making investment decisions. For example, with regard to a bank loan, such a decision could be reached by simple calculation. Imagine that you have a Kshs 100,000 loan at 12 percent interest, and that you get a Kshs 100,000 bonus. Should you invest the bonus or should you pay down the debt? A straightforward answer is: pay down the debt. If your option is to invest it, then the money has to make a return of well over 12 percent to make it worthwhile (note that the returns must be over 12 percent because this computation does not take into account commissions and bank fees in respect of the loan). It is much easier to find good returns on investment without having to fight losses on your debt.
(b) Lack of Knowledge: Throwing your money haphazardly into investments that you do not understand is a sure way to lose it quickly.
Saving to invest
Remember the old story about the grasshopper and the ant? The grasshopper did nothing but play and sing, while the ant toiled and saved. The grasshopper thought the ant was dull and boring for never taking the time to have fun. The ant on the other hand thought the grasshopper was silly and stupid for not planning for his future. Sure enough, when the weather got colder and all playing, singing, toiling and saving stopped, the grasshopper was left out in the cold with nothing, while the ant was snug in his well planned retirement home.
In reality, people generally have a combination of both ant and grasshopper traits. While having fun keeps life from getting dull and boring, saving for the future is part of a wise life plan. And when the economic situation is uncertain, saving for the future is more important than ever.
Dr. Lynn B. White, Texas Cooperative Extension family economics specialist, lists four general reasons for saving money:
(a) Emergency fund to prevent personal financial crises;
(b) Revolving savings to cover the cost of ‘now and then’ expenses such as insurance premiums, property taxes, gifts and other infrequent and/or unexpected payments;
(c) Short-term goals to cover the cost of items purchased or events planned during the next 12 to 24 months; and,
(d) Retirement/long-term goals; the earlier we start we saving for these goals, the less we have to save for saving each from our salaries. (It is never too early to start saving for retirement, education of children, major purchases, say for a new home or vehicle.)
To start saving money begin by looking a things you buy weekly and monthly. Simple changes in these regular expenses can add up to funds for saving. For example, one less soft drink at Kshs15 for 52 weeks a year adds up to Kshs750 a year.
Other little changes can yield big savings, say changing brands, and choosing more economical packaging and sizes of these products, as well as using a little less. These could add up to more than you might think. Start by saving Kshs70 the first time for 52 weeks. That may look little, but it is sufficient to purchase shares at the Nairobi Stock Exchange.
A shilling here and a shilling there.
For additional savings possibilities, look at monthly expenses such as utility bills, car payments, housing costs and credit cards. Look for services you pay for and do not use or those that would not have a large impact on your life if you stopped to use them, such as extra TV channels and phone services, more expensive housing, and so on.
Next, look at the amount of money you spend on gifts and special occasions. About how much did you pay for these last year? Could you meet your needs and spend less this year? Subject the amount of this year’s projected expenses from last year’s total, and put that amount in savings. Then divide the projected amount to be spent by 12 (or by the number of salary payments per year) and put that amount in savings each month to cover revolving expenses. When these expenses occur, draw out the amount needed. If you are able to find choices that save even more, leave the extra savings as a cushion for those times when expenses may be a little more than expected.
As goals are reached and new ones are set, think of the fact that you have become accustomed to meeting daily living expenses with this amount of money going into savings. Continue to save it! Let someone in the family keep track of your savings cushion and report it when you meet to plan coming events. You may be able to do something special together as a family or have a head start towards a new goal.
Conclusion
Your reasons for investing are bound to change as you go through the ups and downs of life. This is an important process because the only other option is to invest with no purpose, which will likely result in investing practices that reflect your uncertainty and cause your returns to suffer. Your reasons and goals will have to be reviewed and adjusted as your circumstances change. Even if nothing significant has changed, if is always helpful to reacquaint yourself with your reasons at regular intervals to see how you have progressed. Like running on a treadmill, investing gets easier and easier once you start.
Reflection/Action
Would you rather spend your tomorrow today or save today and spend it tomorrow?
