How to teach your children to be investors rather than spenders

During my interaction with students in high school, I discovered that most teenagers are clueless about investing. They get an “A” for knowing how to spend money, and many work hard for income, but few know how or why they should invest in stocks, mutual funds, or index funds. Typically, most teenagers haven’t thought about building wealth by paying themselves first. This is a consequence of the wrong orientation about money.
Sometimes the biggest obstacle to making money is our perception. We believe investing is rocket science, or something that only professionals can do. By giving your children the confidence to manage and invest their own money, they can learn to be financially independent with the freedom to do what they want in life.
Do you want your children to be spenders or investors? In reality, they can be both. Before your children get their first credit card, show them how to make money work for them by investing.
Here are some actions you can take if you want your children to build wealth:
1. Teach them how to save: You can channel their cravings for material things like toys into an opportunity to learn how to save. You can provide piggy bank for them and encourage them to put out some amount of money periodically until the piggy bank is full. Then, they can go ahead to acquire whatever they want. I can remember vividly how we used to construct wooden containers popularly known as "save" mostly at the onset of the ember months. Then we save all the monies given to us by our generous uncles. During Christmas, we break open the "save" to know how much we were able to accumulate. Often we were astonished by the amount we saved. That singular act thought me the importance of savings. It equally increased my craving for investment. Kiddies find such ventures exiting.
2. Teach them with stories and pictures: Have you ever wondered why kiddies texts are filled with stories and pictures? The answer is not far fetched. They learn more when you tell them stories. To make the learning process more fun, you can use diagrams to illustrate the connection between savings, investment and financial prosperity.
3. Teach them the principle of compounding: the concept of money making more money was once regarded (by Albert Einstein) as the eighth wonder of the world. Kiddies should be taught how money "grows" through compound interest.
4. Keep it simple: It'll not make any sense to them if you start by  telling them about stocks, bonds, mutual funds etc. Rather, you can start by teaching them how they can save money and how to use the savings to have ownership stake in the company that produces their favourite toys.
4. Practice what you preach: Children learn a lot by observation. So, you can't be teaching them how to save and invest when you're financially irresponsible. You can't teach them how to be prudent when your spending and indulgence is out of control. Your lifestyle should be a lesson to them.
Indeed, the confidence and knowledge to invest is a critical gift to your children.

Read More

If you can't save, please read this!

Ordinarily, savings means regularly putting aside a portion of the money you are given or earn in a safe place that pays interest.

We live in a society enmeshed in consumerism. Everyone crave for societal recognition by indulging in mindless acquisition. The importance of savings had been so relegated, especially among the youths. I keep wondering how far this generation can go in wealth creation with this poor attitude towards savings and investment. 

It is high time the young ones stopped believing that savings and investment are meant for parents alone. It is time to key into the financial system by adopting savings culture and other financial management techniques that would help secure our future. Imbibing sound financial principles at an early age would go a long way to help students and young ones manage their resources effectively, appreciate how money works and how it can be channeled to productive ventures now and in the future.

Saving money from early age guarantees financial independence, prudent management, planning and overall success of individuals and society.

The money saved should be placed in a financial institution for safekeeping and to earn interest on your money. But remember that the interest on your savings should be above inflation rate. This reduces the risk of spending, theft and gives your money the chance to grow. Savings is a precursor to investment. 

Conceptually, investment is the acquisition of assets (real or financial) for income generation and capital appreciation. I also consider intellectual property an asset. The economic growth of any society is hinged on the depth of investment of the people. On the other hand, the depth of investment is determined by the people's propensity to save. Any society with poor savings culture is doomed to remain in economic stagnation. Sadly, this is the situation in Nigeria. Our propensity to consume is on a stratospheric increase while our propensity to save is cascading rapidly. 

There is need for the young ones to change this tide. It's time we realize that economic growth is not determined by how much we make but how much we save. We can only invest when we have robust savings. It is impossible for a society without savings culture to grow. 

Fortunately, there are institutions with great commitment to drive and deepen prudent and effective management of resources among the populace, especially youths. Prominent among them is Investment One Financial Services. 

Investment One is a financial power house in Nigeria, a former investment arm of Guarany Trust Bank. They're registered with Securities and Exchange Commission as Fund managers and stock brokers. They have a number of financial products tailored for different category of investors. This investment bank is involved in securities brokerage, fixed income and mutual funds investment. These funds are invested in stocks and other money market instruments like government treasury bills, company commercial papers, FGN bonds, state development bonds etc. 

The following funds are professionally tailored to meet the needs of young Nigerians who are keen on preserving and stealthily growing their capital;

Abacus Money Market Fund is an open-ended Investment Scheme with competitive returns. A diversified portfolio with investments in quality money market instruments, short term debt securities, such as banker’s acceptances, Commercial papaers, and treasury bills.

The Investment One Vantage Balanced Fund (VBFUND) is a balanced mutual fund that was created to maximize long term capital growth and maintain regular income.These funds are invested in Equities, Fixed Income, Money Market and Real Estate.

In 2017 alone Abacus money market fund and Vantage Balance Funds  both managed by Investment One Funds Management returned 17 and 25 percent per annum respectively to their investors as interest income. Interest are paid on quarterly basis. There's also provision to reinvest earned interest.  No commercial bank can beat that. Most commercial banks pay between 3 and 4 percent per annum on savings account. 

 I enjoin everyone to key into this avenue provided by Investment One financial services to invest in our financial market and reap the benefits therefrom. Being a participant in our financial system provides an amazing opportunity to fully understand how the principle of compound interest works. It enables us to earn a decent income while learning financial management from a practical perspective. 

I want our youths, who are the hope and future drivers of Nigeria, to understand and appreciate the importance of prudent management of resources and other initiatives that have the capacity to positively impact lives and by extension, the society. This is to ensure their financial security and independence in future.

Read More

You can't afford not to invest

If you are not investing you are giving away money, simple as that. If you have your money under your mattress, or in a save deposit box, this money is losing value. Why? As we all know, due to inflation. Most of the developed economies are pursuing monetary policies that try to achieve higher inflation rates, known as expansionary monetary policies.  Every single person that has an income should be investing a percentage of its money, period. If you have a salary and you are keeping all this money in your account without producing any return, you are not financial savvy, and what is worse, your bank is not doing you any favor by failing to educate you on the time value of money. So, if you don’t have anything invested… START NOW! You can thank me in when you see the power of compounding working miracles for you.

Investing is not a game, it is not science either. This is why statistics plays such an important role in investing (a topic that we will leave for a different post), and why no one should believe statements from financial advisers such as: “I assure you 10% annual return,” “This investment offers 5% annual return and is risk free,” and so on.

What I am trying to get across is that everyone that has an income should be investing, but that it is important to acquire a basic knowledge of the financial markets before doing so, even if you are going to go with a financial adviser, a private banker or any type of asset manager. Why? Because the most important person for each of us is ourselves, and if a money manager has to pick between the well being of himself and the one of the client, it will definitely pick himself. It gets worse if you are a medium or small investor, since your financial adviser will always fulfill the big client’s necessities before yours. So, to sum up we all need to have a basic understanding of the financial markets before starting to invest, this is the only way to shield our patrimony.

In this post I am going to provide the 10 most important points that you should have clear before you start investing.

1. Should you be investing?

I know that before I said “anyone with a salary should be investing,” but there are particular cases in which this might not be true, at least for some time. If you have debt at a high interest rate (almost all credit card debt will match this definition) you should pay it off entirely before even thinking about putting any money into the market. It is simple to understand why. If you owe money and the interests are, fore example, 10%, it doesn’t matter if you can invest in the markets and make an average return of 9%. You are still losing 1% in comparison with the situation in which you pay off all this debt. Now, if you have a mortgage with an interest payment of 3%, you should not pay off the whole mortgage before you start to invest. In this case you can make, using our previous example, 9% investing and only pay 3% interest for the mortgage. So you will make 6% more than if you just completely pay off the mortgage. The relationship is oversimplified in this explanation, for example that 9% return is not secured; it might vary depending on the market conditions, while the debt will still be due regardless. This is why a lot of radical risk-averse people would prefer to pay off the debt before investing, despite of proven fact that, in average, they are losing money. The second situation in which you should not invest, even if you have a salary, is that one in which you don’t have an emergency fund. Every rational person should keep some amount of money  in an account just to make sure that an adverse event does not challenge her financial situation and that she doesn’t need to pull money from her investments. However, if you are debt free, you have an emergency fund, and you have a salary… You better be investing!

  2. What are you investing for?
Are you investing to pay for your kid’s university, to buy a new car, to take that around the world vacation that you have always dreamt of, to enjoy a nice retirement, to have a passive income? As you can see, there are a limitless number of reasons to invest. You need to understand yours because depending on what you want to invest for; you are going to use different investment vehicles to achieve your goals. Let’s give a few examples to better understand it.
If you have a sizable amount of money and you want to leave of it, or just have it produce some income for you, you can buy dividend stocks and bonds that will assure you a stream of cash. If you get the right mix, you can enjoy a steady income over the years in order to use as you please.
If you meet the following criteria
You are in your 20s or in your 30s
You have an emergency fund
You have a salary
You are debt free
You don’t have the need to pull money out in the next decades
you should create a balanced portfolio with a high level of risk. Most likely it would include a high percentage of equities and a sizable exposure to emerging markets with a high growth potential.

3. There is no return without risk
No one, wait I’ll repeat: NO ONE is telling the truth if they say they can offer a return higher than the risk free with no risk. It is just not possible. In our post Risk in finance and the why of risk management  we gave a comprehensive explanation of what risk is and how to measure it, so take a look to refresh your mind.

4. You have an optimal risk target, find it!
In the investment world, you should not aim for a particular return; it is never the right strategy. The process should start by identifying your level of risk, and only then maximize the level of return for that particular level of risk. The real key variable is risk because at the end of the day, if you risk too much you might go bankrupt and you don’t want that! This is why we need to decide what level of risk is appropriate for us. How do we do it? We need to assess our risk profile. In most developed countries, registered financial advisers are required to assess the risk profile of their clients. These financial advisers will provide a questionnaire that will try to gauge the following characteristics of the investor:
Time horizon
Cash requirements
Attitude towards risk
Financial situation
At the end of the day what the financial advisers are trying to find out is what amount of money are you willing and able to lose within a particular level of probability. You should try to find this number before committing any money to the financial markets. It will be truly dangerous to invest in a vehicle in which you can lose more money than the amount you are comfortable with losing. As you can see, you not only have to understand your level of risk but also the different investment vehicles in order to know what is the risk of investing in them.

5. Diversification is key
In order to diversify you need to know about the different asset classes. We are currently building a database with as many possible investment vehicles that exist with their description and characteristics. For now, this are some of the most common investment vehicles, including alternative assets: stocks, bonds, derivatives, real estate, commodities, derivatives, hedge funds, venture capital, private equity…

6. Economies follow boom/burst cycles
Economies, as human emotions, rise and fall. Understanding how the economic cycle works, in which phase do we stand, and which type of companies and investment vehicles perform better in each particular phase of the cycle is completely crucial to perform in the investment world.

7. Always question your investment selection
Understand that if you are selling, someone is buying and that if you are buying, someone is selling. So, there is someone in the other side of the trade that is, on average, as smart as you. Try to find out why that person is taking the other side of the trade. In other words, take your strategy and try to see how it could go wrong and with what probability. This reflection might show you that your strategy is not as robust as you thought or it might give you even more reasons to invest, regardless; it is a necessary and sometimes forgotten step.

8. What is the cost of investing?
Now that we know our risk level and that we should diversify we need to focus in which investment vehicles we are going to use to create our portfolio. We cannot stress sufficiently how important the cost of an investment is for its final return, and how many times these costs are completely neglected by the investor. The costs come from different sources: brokers, financial advisers, investment vehicle, and others. You can understand how to minimize these costs and control them, and only then, it will make sense to invest.

You should always do the appropriate due diligence, find out how the fees of the different brokers, financial advisers and investment vehicles relate. This is substantial to realize the highest potential returns. The final, but not least important, type of cost that we should care about is the cost associated with taxes. Understanding the tax treatment of the different type of investment vehicles and their returns is key for investors.

9. There will be ups and downs
The markets are not gentle, be prepared. You might see green from the moment you start your portfolio, but most likely it will be a bumpy ride. The best strategy is not to continuously check how your investments are doing. This might make you sell at lows and buy at highs. You invested due to some reasons, and while the reasons that make you invest in something do not change you should not care about the short and medium term price action. History teaches us that in the long run a buy and hold strategy in a diversified portfolio should enjoy significant returns. Just to put an example, there is no 20-year period in the history of the NSE in which, after adjusting for inflation and accounting for dividend reinvestment, you would have had a negative return. I understand that the fact that this hasn’t occurred yet doesn’t mean it will never occur, but is just some nice food for thought. So, once you invest, stay patient and calm, try to keep emotions out as much as possible and only rebalance your portfolio once some change in the markets makes your portfolio inefficient.

10. Stay current with what’s happening in the world
There will be economical, political, environmental, social… and many other types of events that are going to be affecting your investments. It is really important that you understand what is happening in the different fields that affect your investments in order to understand what can happen to them. An early identification of a future trend can save you or make you a lot of money. Imagine that you have a lot of your money tied up to oil related investments. If suddenly a new energy is discovered that can displace oil due to its better characteristics, cost, quality, power, availability, environmental impact, accessibility… you might want to start limiting your exposure to oil, and the only way to find out about this type of news is by reading what’s happening in the world. I recommend to always read the news from different countries and also associated to different types of political affiliations because how some news are presented will be affected by the background of the news provider.
Keep on optimizing your strategies.

Read More

Optimize your investment strategy with these tips

After the 2008-2009 consolidation in the banking sectors, there was a massive boom in the Nigerian Stock Market. This made a lot of people to invest in stocks. But not long thereafter, many of them lost their investments, because they were ill-prepared before dabbling into the market. To avoid making some of the mistakes you have to take heeds to some of these admonition before you invest in shares:

Seek advice

Working with a qualified financial adviser is one way to make a real difference to your wealth. An adviser can help you shape your investment goals and strategies and provide peace of mind when markets become more volatile. There are many investment bankers around who could be of help to you.

Educate yourself

Education they say is power. An informed investor is a good investor. So, be abreast with the happenings in the financial market. Get analysts’ reports on the shares you are planning to buy. Issues like changes to interest rates, currency movements and any geopolitical issues that have the potential to move markets must be of interest to you.

Keep an eye on fees

The fees you pay will affect the return you achieve from your investments. So make it your business to understand the fees you are paying on your investment as well as the fees you pay to your adviser. This little money often adds up to be substantial amount if you don’t keep tab on it.

Consider the impact of forex on your portfolio

Currency movements can have a significant impact on your overall return, both positively and negatively. Whether you choose to hedge your currency exposure will depend on your view of how the value of the currencies to which you are exposed will move. Some investors wish to be exposed to currency movements and others don’t. What is important is to work out which camp you are in and structure your investments accordingly.

Set your investment timeframe

It is easy to be caught up in short-term market moves. And if you like to trade assets on a short-term basis it’s important to keep a close eye on what is happening in markets at all times. But if you have a long-term view, avoid basing investment decisions on what is happening in markets right now. You should be concerned about long-term factors.

Buy when prices are down

Sometimes, it is a prudent strategy to buy quality stocks when their values are depressed because of short-term issues affecting the price of the stock. This can be a great time to buy. But make sure the business is not in a sector experiencing structural decline, satisfy yourself the problems are of a short-term nature only and make sure the business has the potential for long-term growth.

Read More

Leadership: Why Nobody takes Nigerian Youths Seriously

The idea of Nigerian youths in politics and governance has been advanced by several youths and youth groups in recent times. The argument we made back then, remains the same today. The idea of youth as leaders of tomorrow has reduced a demographic majority to a political minority. What this means is that while the youths control the majority of votes cast during elections, they end up controlling nothing after politicians win elections.A close look at the history of Nigeria shows how much the youth have featured prominently in political leadership and governance. But in recent times, the story is not exactly the same.Shehu Shagari became a Federal Legislator at the age of 30 and a Minister at the age of 35. M.T. Mbu became a Minister at the age of 25 and Nigeria’s High Commissioner to the United Kingdom at the age of 26. Richard Akinjide became Minister of Education at the age of 32. Maitama Sule became Oil Minister at the age of 29. Audu Ogbeh was a Minister at the age of 35. He is still serving today as a minister. And the list goes on.In contrast, today’s reality is a polity where Nigerian youths are used as election consultants, social media battalions, and political thugs. Many have blamed the new trend on a conspiracy of the elite class who just cannot stand the idea of vacating the scene for the younger generation creating a system that makes it impossible for young people to emerge and succeed in politics and governance. While this perspective is not entirely incorrect, there are more than enough premises to validate the argument that Nigerian youths are their biggest problem.Greed, selfish ambition, lack of capacity and “over-competition” have conspired to weaken the ability of Nigerian youths to collaborate effectively as a united front that advances the well-being of young Nigerians.Let’s look at some of the challenges that have constrained the Nigerian youth to the fringes of political leadership and governance and why nobody really takes them seriously.First, selfishness. The idea that you must have everything for yourself alone and others can go to hell is a predominant characteristic of young people today.Then you have the integrity challenge. Young people cannot expect to be trusted with leadership if they insult politicians in the social media one moment and the next moment approach these same politicians cap in hand.The third is the mentality of every man for himself; the idea that you must demonize and destroy other youths as long as it guarantees you a spot at the top.Lack of capacity is another major issue. The urge by youths to arrive quickly at the top without first subjecting themselves to building capacity going through process; mentorship, followership, and apprenticeship. Today, many young people want to own a company and lead an organization, even when the capacity for such leadership is lacking.We must not forget poverty. Many youths are constrained by sheer economic pressure and find themselves ready to do anything for survival.Competition in place of healthy collaborations has turned many young people into rat race runners who feel compelled to prove a point that they are the best at what and end up not seeing any good in others.A recently disturbing trend is the rising wave of intolerance to dissenting viewpoints and ideologies. Come to the social media and see what young people are doing to themselves in the name of politics and the superiority contest to establish who holds the best opinion.The ‘Pull Him Down’ syndrome is a predominant characteristic of today’s youth. If it’s not me in that position, whoever else is there must be disgraced, embarrassed and pulled down.Frontline Nigerian blogger Linda Ikeji bought a house and the greatest noise came from young people like her. There was even a time attempts were made to take down her blog.Audu Maikori was arrested for a Facebook comment he apologized for and some youths in the Nigerian social media wanted him jailed.But on a serious note, these are reflections of what young people do to themselves in the name of competition and survival and these are the complicated symptoms that characterize why young people are failing to organize themselves effectively into a powerful bloc of change makers who can inspire true leadership beyond exploits in business and the creative industries.Looking at the concept of political participation and the way forward, it is instructive to note that Nigerian youths must wake up and face the reality that their votes on election day gives them enough power as youths. It is a necessary first step but it is more complicated than that.If you observe critically, you will discover that what most young voters are able to achieve on election day is to validate the options presented to the electorate by political parties. What this means is that the voter is not really the one who wields political power but the party people who decide the candidates we all vote for on election day. The far-reaching implication of this is that when party A and party B give us bad candidates, whichever candidate the majority decides ends up being a bad leader anyway.Going forward, the key to effective youth participation in politics and governance is to begin to get involved at the political party level. That is where all sort of characters we disdain as leaders first emerge. If we are not involved at the level of the parties where decisions are taken on the candidates presented to the electorate, the youths, despite their demographic majority, are unable to effect real change.But let me sound a note of warning. The advocacy for more youths in politics and governance does not automatically guarantee good governance. A corollary to the earlier context I provided is the fact that there are young people who are incompetent, dishonest and corrupt. I have been a passionate advocate of youth in politics and governance but I’m always quick to add that they must be young people with character, integrity, a pedigree, and a track-record. In Nigeria, we don’t look at track records anymore. We need to start really looking at people’s track records, what they have done and where they are coming from.Packaging and social media followership is the language of today’s generation, but it does not qualify you for leadership. Young people must start asking aspiring leaders, especially fellow youths: what have you done? Show us your resume.We must also encourage young Nigerians to build capacity first before parading themselves as superstars. There are no short cuts. A good number of our elders may have stumbled on leadership at a very youthful age, but increasingly, today’s reality requires competence and hard work.All youths cannot go into politics but many of them; the competent ones with character and integrity must get in there. And their fellow Nigerian youths must encourage and not demonize them.Conclusively, young Nigerians will need to also understand that as youths, we are not in a rat race competition. We can coexist to ‘coopete’ – working together even when we have different targets and aspirations. We all need to start looking at ways we can collaborate as young people across political divides. We must learn from the older generation and how they team up together to advance their interests. Enough of this politics of Party A versus Party B that has turned young Nigerians who were once friends into public enemies. This is the only way we can begin to win and change Nigeria together.

Read More

Money mistakes to avoid this year

Making financial mistakes will leave you financially stagnant which is why you need to avoid it to achieve your financial goals in the New Year 2018.Here are five financial mistakes you must avoid in 2018

1. Living beyond your means. Living beyond your means while the little finance you have is going down the drain is really a drastic financial mistake you must avoid in 2018. Stop living beyond your means. If you keep living an expensive lifestyle you cannot maintain, you end up trying to borrow money from people to keep up with that lifestyle, which leaves you in serious debt and incurring debt is bad for your finances because your focus would be on paying your debt instead of focusing on your financial achievements

2. Taking risk you cannot afford. It is good to take reasonable investment and business risk but if you cannot afford such risks, don’t take such risks.Before taking risks, be sure it is worth it and make sure you can afford it.

3. Waiting to invest. Do not wait to have a large chunk of money before you think you can start investing.The best time to start investing is now. No matter how small the income, you should set some money aside for the sole aim of investingThe earlier you start investing, the faster and better you achieve your financial goals.

4. Not saving for retirement early. One of the worst financial mistakes is not saving and planning for retirement early in life.You might think planning and saving for retirement early is a waste of time because you have other financial obligations to meet but you might regret your decision in the future.The best time to start planning and saving for early retirement should be in your 20s when you are already earning an income.

5. Allowing money drain. It’s not a bad idea to enjoy yourself once in a while but if you make it a daily routine to spend so much money then you are making a big financial mistake.Stop wasting money. You should abstain from bad money habit that leaves you broke such as gambling or spending on impulse.Such habits don’t let you achieve your financial goals.

Read More

Building savings and investment culture among Nigerians

Many Nigerians today live below the poverty line not necessarily because they have low incomes or poor salaries, but perhaps they lack savings and investments culture. The Harmonized Nigeria Living Standard Survey reports that Nigeria spends about N25 billion daily on food items. There is high propensity to consume but low propensity to save. This is quite alarming for a developing nation. High consumption would mean low savings, low investment, and low capital formation. If this persists, the Nigeria populace will be engulfed in poverty trap. It is therefore necessary to build among Nigerians savings and investments culture. A review of extant literature revealed that people save and invest for several reasons among which are to enhance the standard of living, take advantage of rare business opportunities, and meet unforeseen circumstances. Savings can be done through piggy, stokvel, thrift collection, credits unions, and banking system while investment is in the form of real asset, financial asset, and foreign exchange investment. Whatever form of investment one contemplates, it is very important to assess the risk-return trade off of such investment. Savings and investments guarantee your future. No matter how small is your income, you must learn to save to mobilize funds for investment. If the standard of living of Nigeria populace must be enhanced, there is therefore serious need for household savings and investment. Savings and investments must be our life style.
Introduction
The Harmonized Nigeria Living Standard Survey of 2009/2010 revealed that the consumption pattern in Nigeria is stewed towards food. Nigeria populace consumes at least N25 billion worth of food daily, which represents about 65% of total expenditure (National Bureau of Statistics, 2012). The less a society spends on food, the more developed the society becomes because the money not spent on consumption is saved to provide the resources that are needed to fund investment. Smiths (1776) recognized the importance of savings when he observed that capital is increased by parsimony and diminished by prodigality and misconduct. Many Nigerians today live below the poverty line not necessarily because they have low incomes or poor salaries, but because they lack savings and investments culture. The Department for International Development￾DFID (2012) reported that about 34.9 million adults population in Nigeria do not save. The propensity to consume is not in any way comparable to the propensity to save. It is therefore imperative that the Nigeria populace have a re-orientation towards savings and investment for improved standard of living. It is on this premise that we ask the following questions. What is savings and investment? Why do I need to save and invest? How do I save? Where do I save? What kind of investment do I make?
What Is Savings and Investments?
According to Olusoji (2003), savings represent that part of net income that is not spent on current consumption, but when applied to capital investment output increases. In other words, saving is a sacrifice of current consumption that provides for accumulation of capital. It is the act of preserving income for future use.On the other hand, investment is the commitment of capital to the purchase of an asset in order to gain profitable returns. Investment is the purchase of an asset with the hope that it will generate income or appreciate in the future. It involves committing money into an investment vehicle in the hope of making a financial gains with possibility of losing it.
Although some people use savings and investments interchangeably, from the professional point of view, saving is different from investment. A review of literature indicates the following differences:
(1) The purpose of savings is for the security and accumulation of capital while investment is for wealth creation. This implies that your motive for savings is to secure and ensure the safety of your money, whereas your motive for investment is for financial gain.
(2) There is high level of liquidity in savings. This means that you have easy access to your money at any time, but this is not true of investment.
(3) There is no guarantee that you will get your money back when you invest. This implies that there is a high level of risk in investment, but savings risk is low. In most cases savings are risk-free.
(4) When you invest, you have the opportunity to earn more money than when you save. In other words, investment generates greater return than cash left in savings account.
(5) The reason why people find it difficult to save is low income, whereas people find it difficult to invest because of uncertainty of returns.
Why Do I Need to Save and Invest?
 People save and invest for several reasons among which are:
(1) To enhance the standard of living – Savings and investment help people to enjoy the same or higher standard of living particularly when they retire from active service
(2) To acquire assets – Most people save and invest in order to acquire luxurious assets, such as expensive cars, landed property, building etc.
(3) For speculatory purpose – Savings and investments are made with the hope of making money available for future purchases with the expectation that prices of goods and services will fall.
(4) For security purpose – Another reason why people save and invest is to prepare for the rainy day. That is for unforeseen eventualities like retrenchment, sickness, and natural disaster.
(5) To raise more capital – People save and invest so as to accumulate more capital. The more capital is invested the greater the returns.
How Do I Save?
In order to be able to save, you must reduce your current consumption on food items. You do not need to have surplus to be able to save. It is recommended that to be financially secure, an individual or household should save at least 10 – 20 percent of net income with the following strategies.
(1) Every day put all your loose change into a pause or a box. Once in a while deposit the money in your savings account-. With time the money will grow.
(2) In every month, set aside a certain amount of money from your income or salaries for savings. The practice is that after paying all of the bills whatever is left is saved. This strategy of savings doesn’t really work because in most cases nothing is left over to save.
(3) Pay yourself first – This is the best strategy for savings. What it means is that you designate a certain amount of your income as your pay and pay that money to yourself before you settle your bills or someone else. This amount may be as little as N100 or a certain percentage of your salaries. You can develop an automatic way of doing this. May be, mandating your employer to make deductions of the amount into your savings account.
Where Do I Save?
The different schemes of savings include:
(1) Piggy – This is a personal home saving scheme whereby people keep money in their cupboard, safe box or under the pillow. This is a very risky way to save money because the money could be stolen or destroyed by fire. Access to the money is not restricted by any means. In those days when the banking system in Nigeria was undeveloped, many Nigerians used to save for Christmas by putting the money in a safe box. But before Christmas, in most cases the safe box is destroyed so as to have access to the money. Unless one is financially disciplined, this is not a wise way to save.
(2) Stokvel – The Stokvel scheme popularly known as Esusu in Eastern Nigeria is another traditional means of saving money. Members usually know each other well and make monthly contributions that are disbursed to individuals in turns often no interest is paid on the savings and it usually runs on a trust basis. There are usually no written agreement and no documentations. In fact there is no legal protection if a member fails to make contributions after taking his or her turn. This method is also called rotational savings and loans scheme.
(3) Thrift Collection – This method is popularly known as Akawo. It is a daily or week contribution of fixed amount of money in the hands of a well trusted individual or group. The Akawo practitioners usually move around soliciting for collections from those keen on saving. They equally give loans to contributors depending on the amount of money saved. Cases abound where Akawo practitioners disappeared with contributors’ money. This makes thrift collection method a risky method of saving.
(4) Credit Unions – Credit union are co-operatives, not-for-profit organizations that exist to serve their members rather than to maximize profit. Credit unions are member-owned and controlled through a board of directors elected by the members. They mobilize savings by collecting deposits from members, make loans and provide a wide array of other services. As member-owned institutions, credit unions focus on providing a safe place to save and borrow at reasonable rates. Unlike banks, credit unions return surplus income to their members in the form of dividend. Credit union is not open to everybody. In order to join a credit union, potential member must be part of a field of membership.
(5) Banking – Banks and other financial institutions such as insurance companiesare other means of saving money. To use this method, an individual must open a savings account with a bank and make deposits into the account. It is a safe way to save and grow your money. Interest is paid on the deposit made though at a very low rate. The customer equally has access to soft loan such as overdraft and salary advance through the banking method of saving. Bank failure could cause deposits to be lost as in the case with All States Trust Bank and Savannah Bank. But with the recent reforms in the banking industry in Nigeria, the bank is the safest place to save your money. The problem with the banking method of savings is that there is a high level of bureaucracy in accessing loan facility.
What Kind of Investment Do I Make?
There are different kinds of investments. These include – real assets investment, financial assets investment, and foreign exchange market investment.
(1) Real Asset Investment – This involves investment in physical assets such as land, buildings, motor vehicle, machineries plant and equipment, etc. It requires huge amount of capital to invest in real assets. This kind of investment has a very low amount of risk, hence its profitability is evaluated in most cases without due consideration to risk. In evaluating the profitability of real asset investment the expected cash inflows have to be estimated using historical analogy, competitive parity etc. Since a naira today worth more  than a naira tomorrow, the estimated cash inflows have to be discounted to their present values. The discount rate used for such discounting in most cases is the rate of inflation prevailing in the country. The various methods used in evaluating the profitability of investment in real assets include –discounted payback, discounted accounting rate of returns, net present value, internal rate of returns, and profitability index. But the riskiness of real asset investment is evaluated using the risk-adjusted discount rate, certainty equivalent, among others.
(2) Financial Asset Investment – This is concerned with the commitment of money for the purchase of securities such as shares and bonds in the money market and or capital market. Bond instruments are in most cases risk-free and they have short maturity period with fixed rate of interest. Interest is the only reward accruable to bond investors. But investment in shares involves a high level of risk due to market forces which are unpredictable. The reward for investment in shares is in two-fold, capital appreciation and dividends depending on the ownership status. The capital required for investment in financial assets depends on the number of units of the security one is willing to acquire. In financial assets investment, there is therefore the need for risk-return trade off. Internal rate of returns is used in evaluating the returns of financial asset investment. The investment analysis does not end with evaluating its returns’; assessing the riskiness of the investment is of paramount importance. Standard deviation orvariance is used in assessing the riskiness of financial asset investment. An investment may have a very good return but if the investment risk is equally very high, it will be irrational to make such investment because investors are generally risk averters. Various theories have been developed in assessing the risk nature of investment in financial assets, such as the modern portfolio theory, and the capital asset pricing theory.
(3) Foreign Exchange Market Investment – This is a foreign market that allows participants to buy, sell, exchange, and speculate on currencies. It is a form of investment where participants speculate on the fluctuating value of currencies between two countries. In foreign exchange market, you can be buying one currency whose value is falling and simultaneously selling another currency whose value is appreciating. Foreign exchange market investment is not a scam; it is just a market that is primarily set up for insiders that understand it. Foreign exchange market investment is usually done through the internet. If you cannot trade for yourself, you can engage the services of a broker or a market marker to trade for you. Investment in foreign exchange takes various forms, such as forex trading,  foreign currency future, foreign currency options, foreign bond fund etc. Although investment in foreign currency is quite rewarding, foreign exchange market involves a high degree of risk including the risk of losing your money. It is the most risky form of investment. Therefore before foreign exchange market investment is made, an assessment of risk-return trade off is also very important.
Conclusion and Recommendation
The importance of savings and investment cannot be overemphasized if there must be improvement in the standard of living of the people. The more cash you have coming in, the more options you have in terms of life style, ability to weather an emergency or economic downturn, and to build a war chest for future investment or business opportunities. Savings and investments guarantee your future. No matter how small is your income, you must learn to save to be able to mobilize capital towards financing investment. Whatever form of investment one contemplates, it is very important to assess the risk-return trade off of such investment either in real assets, financial assets, or foreign exchange. Savings and investments must be our life style to escape the poverty trap.
( culled from African Research Review )

Read More