Why financial literacy matters

Saturday, September 14th, 2019 00:00 |
Cash. Photo/PD/Courtesy

Waithaka Gatumia

To find success with money and investments you need to start asking the right questions.

“Which investment should I make?”, “Which share should I buy on the stock market?”, “What business should I start?” These are all terrible questions that often end in failure and disappointment. Let me explain.

The first problem with questions like these is that they are not driven by purpose. If you invest without understanding why you are doing it then the results may not meet your expectations. You need to invest with a goal in mind. The why will inform the which, where and how.

It is important to know your “why” so that you select the right investment for your goal. For instance: It would be a mistake to put school fees money for next month into a business because it is less secure and you may not get it back in time.

In the same breath if you are investing for expensive university education in years to come then you will be better off taking more risk so that you get a good return over time.

The second problem with asking questions like “which investment should I make?” is that depending on who you ask, they will give you the answer that best suits their own goals. If you ask a real estate agent, land is the solution to all your problems. If you ask an insurance agent the answer will be one of their products.

There are three main goals when it comes to money and investments; capital preservation, growth, and income. 

Capital preservation simply means protecting your money. You want to invest your money somewhere safe so that you can get it when you need it. Savings accounts and savings and credit co-operatives (Saccos) are popular for this goal.

However, to keep the money safe, the bank or Sacco will shy away from high-risk investments on your behalf and so you will get back the money you save with little interest. 

Growth simply means you want to multiply your money or increase your value. You want to get a high return on your investment so that you will have more money than what you invested over time. 

A popular growth avenue is investing in businesses; either by starting or buying one, buying shares in a private business or buying shares in a company on the stock market. 

Your money will create value in the form of products and services which people pay for and you receive the benefits as profit, dividend or increase in share value. However, to gain a high return, these investments are riskier and you may lose money in the short term.

Income means a steady flow of cash to you. Popular income-generating investments are rental properties and government bonds.

You receive rent every month or a coupon from your bond every six months. This puts money directly in your pocket, unlike growth where the value may be increasing with no cash flow.

First, focus your efforts on financial literacy – the ability to manage money wisely – which will give you the power to choose the best investment option for you and allow you to ask the right questions for success.

The writer is CEO at Centonomy Ltd. [email protected]

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