Living with purpose and compound interest

Saturday September 12, 2020 / 09:00 / Chinyere Onyia / Header image credit: Pixabay

Savings is a crucial tool for capital growth which further contributes to economic growth and development through investments. Today, many Nigerians live below the poverty line, not only because of low income or poor wages, but perhaps because of their inability to absorb a culture of savings and investment.

According to data released by the National Bureau of Statistics (NBS) Consumer Spending Pattern, Nigerians spent N40.20 trillion on household consumption expenditure in 2019. This shows that many are consuming more than they save or invest, which is quite alarming for a developing nation.

At this time when there are a myriad of future investment plans, it is imperative for Nigerians, especially the younger generation, to cultivate a habit of saving and investing, in order to grow wealth for the future. . Regardless of how little one earns; it is advisable to save at least 10-20% of your net income. The concept of savings is primarily about mobilizing funds for investments that lead to financial freedom and help improve one’s standard of living.

Some savings strategies that can be adopted are to set aside “cash” in a wallet (physical or virtual) until it accumulates or to set aside a certain amount of money from income or wages and deposit it monthly in a savings account.

Why saving and investing are important

  1. It helps to enjoy the same or higher standard of living, especially after retirement.
  2. It allows the accumulation of funds necessary for the acquisition of assets, such as land, buildings, etc.
  3. With savings or certain investment plans, one can enjoy lower prices. For example, during the holiday season when sales are discounted.
  4. To prepare for emergencies or unforeseen contingencies such as retrenchment, illness and natural disasters.
  5. In order to accumulate more capital which may generate additional interest income if invested.

Gaining financial freedom will be impossible without cultivating the habit of saving and investing. Even in the economic history of nations, it has been established that no nation has developed economically without giving adequate attention to the twin concepts of savings and investment. It has been theorized that for a nation to escape the vicious circle of poverty that has held most underdeveloped nations captive, it must save and invest at least 12% of its gross domestic product or national income.

Savings alone will not bring any individual, company or nation to this level. Each economic unit must invest its savings in viable vehicles that will multiply income and savings. Only investments will greatly increase and multiply wealth because they are often subject to the law or principle of compound interest, which has been described as man’s greatest invention and the eighth wonder of the world.

The Law of Compound Interest operates on the basis and principle that interest earned on the investment itself earns such interest that the investor’s funds continue to work for them endlessly even while they take the time to rest – until the investment process is complete.

Here are different types of investments although this is not an exhaustive list but rather a summary of the possible schemes available for investing. They are: investment in real assets, investment in financial assets and agriculture, entrepreneurship and education.

Investing in Real Assets – Fixing Cash Flows

This type of investment focuses on the acquisition of physical assets such as land, buildings, etc. Investments of this nature are capital intensive and therefore require large sums of money to venture into, although they are often lower risk. Real estate values ​​often appreciate over time, leading to increased cash flow from rental income or future sales. Often, the demand for real estate increases as the economy expands, serving as an investment that can be used to hedge inflation.

Investing in Financial Assets – Baking a Clever Pie

Financial assets such as stocks, bonds, mutual funds or other securities traded in the money and capital market are also forms of investment. While capital market securities have a longer duration, usually over a year, and offer higher returns because they are riskier, money market instruments are usually less than a year and safer, so the reward is often lower but stable compared to capital market instruments. To determine the type of investment you venture into, you must have clear objectives, understand your risk tolerance and seek advice from experts in the financial markets industry in order to make the best investment decision.

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Entrepreneurship – Think and Create

Entrepreneurship is also another way to invest savings in a lucrative business. It involves conceptualizing and setting up a business with the goal of turning one’s savings or capital from other sources into higher returns.

Starting a business and ensuring its viability requires interest, knowledge, skills and an ability to take advantage of opportunities. With the unemployment rate in the country and the rise of e-commerce driven by technology, many can start business activities with minimal capital.

Investing in Agriculture – Going Green for Profit

Agriculture is one of the most lucrative sectors in Nigeria with far greater potential as the country develops. The agricultural sector is mainly driven by government plans to diversify the economy. As a result, the sector is very attractive to investors from inside and outside the country. Learn more about investment opportunities in the agricultural sector HERE

Education – Making Brains Matter

It is essentially long term and is generally the best form of investment, as it represents an investment in the human mind, which improves human capital. These can be academic, vocational, professional or in-depth on-the-job courses.

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The importance of saving and investing cannot be overstated, as it is the path to financial freedom. It all starts with the decision to take action to invest in yourself, in viable investment vehicles and also in others.

Regardless of how little your current income is, saving should be your priority. As Warren Buffet advised, “don’t save what’s left after you spend, but spend what’s left after you save.”

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