I read a tweet once that basically said "your 20s is for chilling and 30s is for building".
You have got to be joking - I haven’t laughed harder in a very long time.
That tweet is so wrong. To build you need a foundation. Your 20s is for laying a solid foundation – in this case foundation with regards to investment. In your 30s and above you can consolidate on the foundation laid.
But, if you're already in your 30s and you feel this article isn’t for you - again you're wrong. As the saying goes "the best time to plant a tree was 20 years ago, the second-best time is now".
I started my 1st job 10 years ago, when I turned 21. And I had no savings culture or investment plan. This lingered for the 1st 5 years of my career. I went from zero salary to over one hundred thousand per month and my expenses surprisingly grew at the same pace. Interestingly, over the years as I got an increase in salary, same pattern occurred. I acquired new taste and my expenses grew at the same pace with my income.
Then I realized that in fact, it isn’t how much you earn but instead what you do with what you earn. I had lost 5 years of an opportunity to invest. I had lost 5 years to make my money work for me. A portion that could have been invested had gone unaccounted for.
Before we dive into the asset classes, let me introduce you to our benchmark - Inflation.
So inflation measures sustained increases of prices of goods and services in an economy over a period of time. In other words, inflation signifies a loss of purchasing power. Tracking inflation from an investment angle ensures that what I can buy with N1000 or £10 in 2018, I can still buy it in the future with the interest accrued in addition to the N1000 or £10 capital. Whenever you’re investing look for opportunities that give you a return that is at the minimum equal to the inflation rate. That way, the value of money is preserved.
So what are our options?
1. Savings account
This asset class offers an average of 10% per annum. As an example, Nigeria’s current inflation rate is 15.37%, as a result the returns on savings isn’t a good return for the money you worked hard for as it is not high enough to beat inflation. You’re losing 5.37% value of your money due to inflation.
2. Treasury Bills/Government Bond
When government wants to borrow for less than one year, it does so by issuing Treasury Bills (T-Bills). Hence, T-Bills are short-term debt instruments issued by a national government while Govt bond is long term. In mid-2017, the interest rate on this ranged from 18%-20%. That is great, because it exceeds our benchmark - the inflation rate. However, T Bills rate has dropped to 13% range. This is currently below our benchmark rate.
3. Mutual Fund
This is an investment vehicle made up of a pool of moneys collected from many investors for investing in securities such as stocks, bonds, money market instruments and other assets. This offers rate as high as 17%. This is a sound investment as it is above our benchmark rate. Bear in mind though that unlike of the 1st two options, there is a risk of capital erosion. But based on the history of mutual funds performance in Nigeria, the rates have been sustainable.
The shares of a company measure its financial performance. Nigeria's stock exchange was the 3rd best performing exchange in the world last year, it returned 43%. Almost thrice the inflation rate. Do your research, choose fundamentally strong stocks and invest. Equity investment is a long-term play.
5. Real Estate
Real Estate generates return via capital appreciation, due to increase in the value of the property, and through rental income. In a country like Nigeria, a bulk of the appreciation comes from price increase of the property. Historically, real estate returns as high as 40% per annum. Location and purpose of property plays a critical role in value addition
Finally one we often ignore, and which is my favorite class of investment. You. Yes you are your greatest investment. Unlike all the other options, you are immune to inflation rates, currency devaluation or value erosion. Take that course to take you to the next level, take up new challenges, prepare for new opportunities, read those books. Ensure you are deliberate about improving yourself.
It is one to know all the investment options available, it is another to take the right step. Time is a great currency here and the earlier you start the better. It is much easier to start now than trying to play catch up years later. Besides, you owe it to yourself to pay yourself first which means investing now.
I really enjoyed this post and I'll have to say how a couple of concepts have simply become clearer. While I'm quite savvy with money, investing is not one of my strongest points. At my best, I tend to just stick with a good ol' savings account. But as we can see - that really isn't the best of options. I better start planting my own tree now.
I also really love the last class of asset - investing in yourself!
I'd really love to hear more thoughts on this one. Do you currently try to invest some of your income? which of the classes work best for you? any tips or resources you've found helpful? or do you think it's not the right time? Please share your experience.
And a huge thank you to Tosin for sharing this with us! We were in high school together and she's so passionate about all things money - her enthusiasm is infectious! She's a chartered accountant with over 9 years of experience and also the founder/CEO of Money Africa - a platform that enhances financial literacy and wealth management coaching. Connect with her on Twitter @tosinolaseinde and follow @moneyafrica on Instagram!