Poor people see a hundred naira as a hundred to trade for something they want right now. Rich people see every naira as a ‘seed’ that can be planted to earn a hundred more.. then replanted to earn a thousand.
Saving and investing often are used interchangeably, but there is a difference.
Saving is setting aside money you don’t spend now for emergencies or for a future purchase. It’s money you want to be able to access quickly, with little or no risk, and with the least amount of taxes. Financial institutions offer a number of different savings options.
Investing is buying assets such as stocks, bonds, mutual funds or real estate with the expectation that your investment will make money for you. Investments usually are selected to achieve long-term goals. Generally speaking, investments can be categorized as income investments or growth investments.
If you deposited N,5000 in a savings account at 4% annual interest, it would grow to N7,000 in 10 years (before taxes). The same N5,000 invested in the rental market earning an average 18% a year would grow to N14,000 in 10 years (before taxes).
Tunde sometimes feels like he should be investing, but he is intimidated. What Tunde doesn’t realize is that he is well on his way to growing his wealth because he already is saving on his own and he is taking steps to learn about investing.
Making a choice between either saving or investing will depend on your goal(s) for the money and your risk tolerance. When it comes to building wealth, time is much more powerful than the amount you invest or even the returns you earn. But it also matters where you put your money.
Tunde has his money set aside in a savings account at his bank that pays a 0.08 percent interest rate. Because of inflation, the same items you purchase today will cost more in the future. Even though Tunde is putting away money on a regular basis, is he beating inflation by keeping his money in his bank’s low-interest savings account? The answer is NO. Tunde has a basic idea of inflation — that N1000 today probably will not buy the same amount of goods that N1000 will buy next year — but he’s not sure how investing will help.
Investing takes advantage of compound interest over time, so the more time you invest — in general — the more opportunity your money has to grow.
Risk and Reward of Savings and Investing
Putting your money in a savings account at a bank or credit union can offer a low-risk savings option. Accumulating your savings in a bank account offers the following benefits as you are building funds for future purchases or other types of investments:
Safety – The money is safe from theft and buying binges. Plus, the money is insured so that if anything happens to the financial institution, you still can get your money.
Interest – Although interest rates typically are low, your money will earn interest over time. And compound interest is a way to have your money make money for you.
Ease of access and easy tracking – With online banking, it is easy to check your balances and retrieve your money when you need it.
Every place that people put their money involves some type of risk — even Tunde’s basic savings account. Although Tunde doesn’t have to worry about his existing savings still being in his bank account tomorrow, he still is risking his future wealth by losing out to inflation.
With stocks, you can lose part or even all of your investment in a short period of time. Yet, over the long term, stocks on average have consistently and substantially outperformed inflation.
Determine your Risk Tolerance
You need to understand how much risk you’re willing to take and which types of risk most worry you. Your risk tolerance (the degree of uncertainty you are willing to take on to achieve potentially greater rewards) is determined by a combination of factors, including your investment goals and experience, how much time you have to invest, your other financial resources and your “fear factor.” I have put together a list of questions you need to ask yourself before getting down to investing;
- Are you more concerned about losing money or losing purchasing power?
- How much money are you willing to lose?
- How worried do you think you would be in a severe market decline?
- What kinds of investments might keep you awake at night?
- Do you intend to track your investments daily (a possible indication of unease)?
- How varied do you want your portfolio to be?
What should you Invest in ?
Here comes the big ‘what ?’ on Tunde’s mind!
Most stocks are examples of growth investments that you buy in hopes of selling for a higher price later. But there are other types of investments, including real estate (your home, commercial property), precious metals (such as gold) and energy (such as oil and gas). Some investments, such as rental property and fixed-income securities (such as government bonds), are not meant to be sold, necessarily, but are meant to be maintained as a consistent source of income.
Smart investing doesn’t consist of buying good assets but of buying assets well. This is a very, very important distinction that very, very few people understand. The rental market is a new asset class in real estate investment. With low risk and high returns, Tunde won’t only be building wealth for his future but for his generation.
At rentcrowdy, we have made this possible. Our platform enables investors like you to help renters pay their rent while you earn up to 26% on returns in a year. You can have a great social impact in our dear country by helping reduce homelessness and improving the financial wellbeing of Nigerians.
You get to do a social good while building your generational wealth. I really hope Tunde sees this 😊