The third cardinal rule of effective money management is to invest prudently. This follows from spending wisely and saving for a specific goal such as owning a home, and acquiring earning assets – assets that pay some money at the end of each month.
Investing prudently, is not easy to learn, yet those who must excel in creating wealth, must make this fundamental rule a life style.
Although difficult, takes long to en-grain in the ordinary ways of thinking, it can be mastered by adoption of an investment strategy as a platform translating ideas (thoughts) into realities and habits about money, that link your present financial status to your desired wealth position some years to come. This link must be thought through clearly (envisioning) and ordered (action plan) in such a manner as to allow stepped implementation. Financial pundits call this a financial plan. Every vision accompanied by a clear plan to achieve it will come to pass as long as the owner is courageous enough to join the school of doing and learning along the way. This process builds a character, so central to the continued success of the plan and achievement of the vision.
Money is a tool that when used well brings joy and happiness, otherwise it destroys those who misuse it. In building an-investor character money is the key tool for translating thoughts into more money through an investment actions taken to achieve an investment strategy.
An investment strategy is a game plan that takes you from your current financial situation to the desired situation many years from today. For example, a twenty-five years old graduate, with nothing other than education and an ability to save Kenya shillings five thousand, may first buy long-term shares for a number of years to accumulate the minimum capital required to enter into real estate investment which is his ultimate goal.
You must therefore start by knowing your current financial status and where you want to go, and then you develop a plan to take you there. You therefore must first take an honest inventory of your financial situation and then take a good look at the results of your past financial decisions. In the case of the fresh graduate above, he probably has no historical savings, a (Higher Education Loans Board) loan, a new stream of income that is large enough to afford more than his monthly requirements by about 10% to take into regular savings.
Taking an inventory of financial status involve preparing a personal balance sheet and income statement at the beginning and thereafter periodically to assess progress. And assessing past financial decisions involve an analysis of the relationships of the components of the financial statements, in particular to find out the proportion of income being directed towards the creation of assets and to meet regular liabilities payments. An investment strategy balances the level of risk and the return you expect.
The next step is to take action to grow your asset column to bring additional cash flow in your pocket from investments. This is called passive income.
The decision to grow the asset column is preceded by choosing the type of investor you want to be – a choice between whether you want to do it yourself (active investor) or you want to do it through the use of expert services (passive investors).
Doing it yourself mean that you have chosen to seek knowledge, usually the preserve of a small minority of investors. This is the league in which you find larger successful investors in any economy including popular global names like George Soros, and Warren Buffet. On the other hand investing through others mean that you have chosen to seek answers - hire expert services to investigate the risk as well as get involved with the investment process on their behalf. This category largely buys retail investments that have been packaged for the wider market risk -return expectations. Incidentally, this group represents the majority of investors in any market and is largely in the middle class market segment.
Building the asset column is a big challenge. It requires a balance when choosing between what is good for income and your ego. Ego is both a killer and a builder of character depending on your choices. Billionaire Warren Buffet once said that “wide diversification is only required when investors do not understand what they are doing” - an inference that skilled investors focus on a narrow area of investment or narrow portfolios.
At the household level a key choice is made between buying income generating and income draining assets. One asset that is usually misplaced in the financial report card is the Home. For many families, a home is a social asset that symbolizes status. The forces that drive its selection and purchase are seldom financial or commercial gain but rather social. For this reason among others, a home for the middle class income group, usually consumes a considerable proportion of their income.
Patrick Wameyo, Financial Literacy Educator and Entrepreneurship coach. Email This email address is being protected from spambots. You need JavaScript enabled to view it.
