As much as saving is encouraged by our income, we should save money by simply putting a certain amount aside. We should move on to the stage where we have to decide what to do with our savings. Of course, the savings we have achieved or are about to achieve must provide us with additional benefits. These benefits are desirable if we think about the opportunities we give up saving.
Therefore, the savings are not made just for the savings, but for the future benefits that will be accrued. It is also relevant to write here that the size of our savings will become a determining factor in choosing the type of investment decision we will take. Our savings will also be a function of what we earn and the level of financial discipline we are willing to adopt. However, the investment decision we make should be such that we can maximize our profits. Profits from the investments will be in the form of dividends, profits, rents and other income.
What are the different options available to us?
In considering the options available to us, we will group investments into two major groups, namely short-term investments or long-term investments.
Short term investment
These are investments whose lifespan does not exceed one year. This means that everything we invest, we will get back within a year.
(a). Savings account with a commercial bank.
Usually, when we save with a bank, we don’t intend to keep the money with them for too long. In fact, we can always go the next day and get our money back. Due to the frequency of our withdrawals, the profit we get from them is meager. Usually these investments are safe and guaranteed up to 50,000# even if the bank goes out of business. Thus, our savings accounts have a dual purpose of savings and investment.
(b). Term deposits
These usually take 30 days, 90 days, 180 days and 360 days. The difference between this and savings accounts is that you have the absolute right to withdraw all your money at the end of the investment term. In addition, the interest income on time deposits is slightly higher than that of the savings account.
(vs). Goods of treasure
These are short-term investments with the Central Bank of Nigeria. The Treasury bill is an instrument in which you invest for a fixed period, usually 90 days. Interest is generally fixed and you are guaranteed that you will get your money back. For this, the interest is usually low.
(D). Personal loan.
Another type of short-term investment is the personal loan to a third party. In this type of investment, the two parties involved generally agree on the interest rate to be paid at the end of the loan period. More often than not, personal loans attract higher interest than all the other investments mentioned above. However, the risk involved is that the entire investment may be lost. Sometimes this can lead to hatred, especially if no formal agreement is reached.
(e). Cooperative and savings
It is a type of investment that serves a dual purpose, in that you earn interest on your savings and you have the ability to borrow. It is therefore a system strictly based on trust and good neighborliness. Except in rare cases, the events of default are minimal because it is a collective investment protected by all parties involved.
(F). Other short-term investments.
Other short-term investments include buying and selling, joint venture projects, etc. Although more often than not, it may be legally impossible for people in full employment to channel their savings into this area, except in terms of personal loans.
Long term investments
These are investments with a lifespan of more than one year. This means that the amount invested in these companies should not be recovered in a year. Of course, long-term investments come in many forms, some of which will be described in detail.
Types of long-term investments
This involves buying shares of listed companies on the Nigerian Stock Exchange. Upon purchase of shares, a certificate known as a share certificate is issued confirming the holder’s partial ownership of such certificates.
Each year, if the company makes a profit and decides to share it among shareholders, dividends are paid based on the number of shares you own. Moreover, if the company continues to perform well, the value of the shares increases; this is called capital appreciation.
In addition to the usual annual dividend, you can also dispose of your shares at any time. The privatization program provided everyone with an excellent opportunity to invest in shares of companies being privatized. However, a small investor, for example, cannot determine what he will earn on such an investment. Stock certificates were once accepted as collateral for borrowing from financial institutions.
Investment in Unit Trust
This is an investment opportunity open to those whose income or savings may be too low to invest directly in the company’s stock. In this regard, a fund manager draws resources from various investors known as unitholders and invests these funds in various companies, providing a wide range of opportunities to balance their risks and returns.
Purchasing an insurance policy that falls under the categories below is a type of long-term investment. Life insurance policy, education endowment policy and personal pension plan.
To be continued tomorrow
Oluwadele, Ph.D., is a Canadian-based chartered accountant, author, and public policy researcher.
Email: [email protected]