Save and Invest A-S-A-P

Listed and analysed below are series of salient points on the basics of savings and investment. The import of this paper is to enable you understand the importance of planning for your financial future.

Why Save and Invest?
We start with this question because many people believe it is impossible to save talk less of investing where you do not have enough to care of your immediate needs. It starts like this: we work; we earn; we chop; then…we ‘siddon’ look for our next pay cheque. Many people experience financial hard times when they get older because they never got the facts on saving and investing. In order to be financially healthy, you must create room for saving and investing.

The best way to achieve financial success is to plan for it. Maybe you would like to:
• buy a car when you graduate from the citadel of higher learning;
• have some money set aside for special occasions or emergencies;
• build or buy a house someday; or
• live comfortably in retirement.

Once you decide what you are saving for—and when you would like to have it—you can decide how you should save and invest.

The best time to learn about money is when you're young and/or still in school. But unfortunately, we seldom take this advantage when we are young. For instance, people in my generation (myself inclusive) learnt the art of money in the hard way.
However we were taught some mathematical concepts such as Simple Interest, Compound Interest etc while we are growing up. We never see the bigger picture in regard to these subjects. We are so much obsessed with learning to pass examination. Perhaps, all the mathematics, physics, economics etc that we studied in school are put in place to prepare us for the future. In order to buttress my point, let’s check out the magic of "compound interest."

What Is “Compound Interest”?
Compound interest is the interest you earn on interest.

Illustration Using Basic Arithmetic
If you have N10,000.00 and it earns 5% interest each year, you'll have N10,500.00 at the end of the first year. But at the end of the second year, you'll have N11,025. Not only did you earn N500.00 on the N10,000.00 you initially deposited - your original "principal" - but you also earned an extra N25.00 on the N500.00 in interest. Twenty-five naira may not sound like much at first, but it adds up over time. Even if you never add another dime to that account, in 10 years you'll have over N16,200.00 through the power of compound interest, and in 25 years you'll have almost N34,000.00.

The above is just an illustration using an amount as low as N10,000. Could you imagine the returns on millions of naira?

Here, we are discussing consumption versus savings and investment. Imagine you spend N1,000 on GSM recharge cards every week for say a period of 5 years, you'll spend N260,000 on recharge cards. If you give up or reduce your expenditure on that recharge cards by half and invest the money (ie N130,000) instead, earning 5% interest compounded every year for 5 years, you'll have over N165,916.60.

How Can I Save and Invest?
Many people get into the habit of saving or investing by following this advice: "Pay yourself first." Many people find it easier to pay themselves first if they allow their bank to automatically remove money from their salaries and deposit it into a separate savings or investment account. Other people pay themselves first by having money automatically deposited into an employer-sponsored retirement savings account (RSA) which is otherwise known as Pension contribution.

There are many different ways to save and invest, including:

• Savings Accounts
If you save your money in a savings account, the bank will pay you interest, and you can easily get your money whenever you want it.

• Endowment/Insurance Schemes
These schemes tend to offer higher interest rates than savings accounts.

• Fixed Deposit Accounts
You can earn an even higher interest if you fix your money while you promise that you're going to keep your money in the bank for a certain amount of time.

• Stocks
This may sound distasteful to you. But it remains a feasible cause to own part of a famous viable company that provides some of the services you and I enjoy. When you buy stock in a company-you become one of the owners while you secure your future. (Well, let’s move on as I leave this monumental topic for another day)

• Bonds
Many companies and government borrow money so they can meet their financial needs and be successful. One way they borrow money is by selling bonds. When you buy a bond, you're lending your money to the company or government so. The company and/or government promise to pay you interest and to return your money on a date in the future.

• Mutual Funds
This is another way to go. You can buy stocks and bonds by buying shares of a mutual fund. A mutual fund is a pool of money run by a professional or group of professionals who have experience in picking investments. After researching many companies, these professionals select the stocks or bonds of companies and put them into a fund. Investors can buy shares of the fund, and their shares rise or fall in value as the values of the stocks and bonds in the fund rise and fall.

• Real Estate
This is the new and latest bride in town. It is an acceptable norm that landed properties appreciate and never depreciate hence everybody wants to own land and houses. But this greatly depends on your diverse motive of owning these properties – asset or investment. As an investor you buy, hold and sell the property when it appreciates.

Risk and Return
Every item of savings or investment mentioned above has its advantages and disadvantages. Kindly note that every investment involves risks. Generally, some of the issues are:
• How fast you can get your money when you need it,
• How fast your money will grow, and
• How safe your money will be.

For example,
• Savings Accounts
Your money in Savings Account tends to be very safe because it's federally insured through the Nigeria Deposit Insurance Corporation (NDIC), and you can easily get to your money if you need it for any reason. But there's a tradeoff for security and ready availability. Your money earns a low interest rate compared with investments. In other words, it gets a low return.

• Endowment/Insurance Schemes
With these products, your money is safe depending on the viability of the Insurance or Investment Company. However, your money is not readily available until the agreed maturity date. Return here is high.

• Stocks
For decades, the investment that has provided the highest average rate of return has been stocks. But there are no guarantees of profits when you buy stock, which makes stock one of the most risky investments. If the company doesn't do well or falls out of favour with investors, your stock can fall in price, and you could ‘lose’ your money.

You can make money in two ways from stock. These are:

1. Capital gain or appreciation - when the price of the stock rises as a result of its good performance.
2. Dividend - when a company pays out a part of its profits to its shareholders. This is not automatic as a company may decide not to pay out dividends, choosing instead to keep its profits and use them to expand the business.
One of the riskiest investments you can make is buying stock in a new company. New companies go out of business more frequently than companies that have been in business for decades or longer. If you buy stock in a small, new company, you could lose it all. Or the company could turn out to be a success. You'll have to do your homework and learn as much as you can about the company before you invest. And only invest money that you can afford to lose.

• Bonds
The company's "promise to repay" your principal generally makes bonds less risky than stocks. But bonds can be risky. To assess how risky a bond is you can check the bond's credit rating. Unlike shareholders, bond holders know how much money they will make, unless the company goes out of business. If the company goes out of business or declares bankruptcy, bondholders may lose money. But if there is any money left in the company, they will get it before shareholders. Bonds generally provide higher returns (with higher risk) than savings accounts, but lower returns (with lower risk) than stocks.

• Mutual Funds
The risk involved in Mutual fund is determined by the stocks and bonds in the fund. No mutual fund can guarantee its returns, and no mutual fund is risk-free.

• Real Estate
The risk here is limited and human. You may encounter risk when you buy property from swindlers. Also, you can not rule out the unscrupulous ‘omo onile’ factor.

Conclusion
Always remember: the greater the potential return, the greater the risk. Risk is scary because no one wants to lose money, but there's also such a thing as "too safe." We all know that prices go up. That's called inflation. For example, a loaf of bread that costs fifty naira today could cost one hundred naira ten years from now. If your money doesn't grow as fast as inflation does, that's like losing money, because while fifty naira buys a whole loaf of bread today, in ten years it might only buy half a loaf.

How to Handle your Risk and Return

1. Diversify
One of the most important ways to reduce the risks of investing is to diversify your investments. It's common sense: don't put all your eggs in one basket. If you buy a mixture of different types of stocks, bonds, or mutual funds, your savings will not be wiped out if one of your investments fails. Since no one can accurately predict how our economy or one company will do, diversification helps you to protect your savings. If you had just one investment and it went down in value, then you would lose money. But if you had ten different investments and one went down in value, you could still come out ahead.

2. Manage your money
Many people do not understand what personal finance or budget means. They neither believe nor operate one. For you to excel financially, you need to plan your inflow and outflow adequately.

You should be accountable for every naira that goes in and out of your pocket.
Do not jump at every offer thrown at you by banks. Some of them might turn out to be a Trojan horse. Very prominent examples are credit cards which have entrapped and enslaved a lot of people due to high charges and interest rates.

I am not condemning credit cards. If you owe money on your credit cards, the wisest thing you can do is pay off the balance in full as quickly as possible. You may only have problem with the cards when you do not repay in full.
Once you can manage your money, then you can save and invest.

3. Make a Plan
The key to financial security is to have a "financial plan." That means you should set financial goals and start saving or investing to reach those goals. While that may sound hard, it doesn't have to be. You'll first need to figure out where you're starting from – for example, how much do you owe, how much money have you saved already, how much money will get from your job or your parents. Next, you should set goals. Do you want a car? A further college education? New clothes? Once you know what you want, when you want it, and how much it costs, you can figure out how much you need to save each week or month or year.

4. Save and Invest for the Long Term
Perhaps the best protection against risk is time, and that's what young people are fortunate to have the most. On any day the stock market can go up or down. Sometimes it goes down for months or years. But over the years, investors who've adopted a "buy and hold" approach to investing tend to come out ahead of those who try to time the market.

5. Investigate Before You Invest
Another way to reduce risk is to do your homework before you part with your hard-earned cash. Consult financial experts and regulators to check up on the background of any person or company that you're considering doing business with. Find out as much as you can about any company and that landed property before you invest in it. And beware of "get rich quick schemes." If someone offers you an especially high rate of return on an investment or pressures you do invest before you've had time to investigate, it's probably a scam.

6. Avoid the Costs of Delay
I believe you are all familiar with these assertions: delay is dangerous; procrastination is a thief of time, ‘time na money’; delay is the deadliest form of denial etc. But we rarely take them serious. As important as time is, it can be the most important factor that will determine how much your money will grow. If you saved 1,000 naira a week at 8% interest starting from the time you were eighteen years old, you would have N1,679,532 saved by the time you're 50. But if you wait until you're 30 years old to start saving, you'll have to save N2,933 a week to catch up. In fact, just one year's delay – waiting until you're 19 years old to start saving 1,000 naira a week at 8% interest – will cost you a whooping sum of N135,995.81 by the time you're 50.

Thank you.