Everybody can be wealthy in life if only we are ready to pay the price for wealth creation.
You can’t pay the price for wealth creation if you don’t have investment mindset. How I wish someone told me what I will be sharing with you now while I was much younger. The reason is because time is a very vital factor in Investment. The earlier, the better.
During the era of the Ponzi scheme called MMM, many people, especially Nigerians lost large amount of monies. These loses would have been averted if we knew about several other safer investment alternatives. Everybody makes money in various amounts from time to time. However, what matters is not how much you make, but how you are able use what you make to make even more money.
The poor spends their money on luxuries because they want to please people, the middle class spends their money by buying liabilities because of lack of knowledge, while the wealthy invest their money to yield more money. In the parable of the talents, three persons had money, but they chose to use it in various ways. This is similar to what happens to many of us today. We don’t make proper use of the money we get. We see every money we get as an opportunity to spend.
With every dollar or naira, you get, you stand a chance to remain poor, middle class or wealthy. It’s all about how you use the money you make. Even if you are born without the proverbial silver spoon, you can be wealthy through the proper use of money. Warren Buffett is one of the wealthiest men in the world mainly because he is an investor. He is started investing in stocks over 5 decades ago and today he is reaping the dividends of compounding.
The purpose of this article is to create an awareness in you about investments and how to maximize your TIME and INCOME to become wealthier.
Power of compounding
Compounding is said to be the 8th wonder of the world. People become wealthy through investment by maximizing the power of compounding.Through compounding, you can turn a small amount of money into large sum over time.
Compounding is the process of reinvesting the earnings from your investments, either in form of interest or growth of the investment or asset so as to earn even greater returns. Anybody can use the principle of compounding to become wealthy.
For example, if you invest a fixed sum of 100, 000 at an annual interest rate of 10% with the interest accrued being reinvested, this is what will happen:
* After 10 years, the money will be worth N259,374
* After 20 years, the money will be worth N672,749
* After 30 years, the money will be worth N1,744,938
* After 40 years, the money will be worth N4,525,918
* After 50 years, the money will be worth N11,739,063
* After 60 years, the money will be worth N30,488,097
* After 70 years, the money will be worth N78,974,494
* After 80 years, the money will be worth N204,839,425
* After 90 years, the money will be worth N531,300,522
* After 100 years, the money will be worth N1,378,056,222
Can you see the power of compounding? From above you discover that N100,000 would be worth over 1 billion after 100 years. We used a small amount of N100,000 and we didn’t add to the money except reinvesting the interest. You get better results with larger amount.
What is an investment mindset?
An investment mindset is a mindset that always thinks of:
1. How to grow wealth.
2. How to sacrifice momentary pleasures for future financial gains and happiness.
3. How to find more investment vehicles that would take one faster to the place of wealth.
What is an Investment?
To invest is to put in or allocate money or other forms of resources in an enterprise or business venture in the expectation of profits, return or growth.
Investment is like a seed plant and which has to take some time to germinate, grow and begin to bear fruits that will nourish the planter.
Investment takes time to grow and mature. It takes discipline, determination and sacrifice to nurture. However, one good thing about investment is that once they grow and mature they keep making you money without doing anything or much effort from you again.
You Are Never Too Young to Start Investing
Yes. No one is too young to invest. In fact, the earlier you began to invest the better for you because time is a very important factor in compounding as we saw above. The more time you keep your money invested, the better the yield on the capital. Encourage your children to start early to invest for the future.
One good thing about Investments (especially paper assets) is that they are cheap and easy to create. For example, with N5000 you can invest in most paper assets.
Investment Vehicles of Wealth Creation
An investment vehicle is platform or medium of growing your seed money. Investment platforms vary based on various factors which includes:
1. Minimum initial allowable fund – This is the minimum amount that you can invest.
2.Tenure – This is the amount of time you can keep your money invested after which you can remove your money with attracting any penalty.
3. Interest rate – This is the yield or profits accrued per annual on your Investment.
4. Risk profile – This is the likelihood of losing one’s capital.
Types of Investment Vehicles
1. Stocks – A share or stock is a document issued by a company, which entitles its holder to be one of the owners of the company or one of its shareholders. A share is issued by a company or can be purchased from the stock market. By owning a share, you can earn a portion and selling shares you get capital gain. This is a high-risk Investment, but it also has a high profit potential. This is usually a long-term investment. Usually better if you are investing for 5 ,10 years or more.
2. Bonds – According to investopedia, a bond is a fixed income investment in which an investor loans money to an entity (typically corporate or governmental) which borrows the funds for a defined period of time at a variable or fixed interest rate. Bonds are used by companies, municipalities, states and sovereign governments to raise money and finance a variety of projects and activities. Owners of bonds are debt holders, or creditors, of the issuer.
This a zero risk Investment, but has a moderate profit potential and the tenure is usually above 1 year and even get to 10 years or more, depending on the type of bond, as there are short-term and long-term bonds.
3. Treasury Bills – Treasury Bills are short-term government securities issued on behalf of the Federal Government by the Central Bank of Nigeria, CBN to control the supply of money in the economy and to finance expenditure.
This is a very safe form of investment, without any risk of capital loss. The tenure varies: 90 days, 180 days or 365 days etc. You can always choose to roll over your investment when it matures.
4. Mutual Funds – Mutual fund is an investment scheme which invests monies pooled from many investors into various forms of investments like stocks, bonds, treasury bills, real estate, agriculture and other capital and money market securities.
Periodically, the profit made from the investments is shared among the various investors according to the amount of each person’s investment.
This can be a very safe investment depending on the type of mutual fund you choose to invest in. Money Market Mutual fund is the safest and there is no risk of capital loss but may not yield as much return as other type of mutual funds.
5. Real Estate – This involves investing in houses and buildings. You build or buy the buildings and resale after some time or you lease out. If you don’t want to get directly involved, you can also invest in a real estate mutual fund.
6. Fixed deposit – This involves putting your money in a fixed deposit account without touching it for an amount of time at the bank for a certain interest rate. You are being given a certificate of deposit as a proof of your investment.
It is a safe investment, but the interest rate is usually very low, when compared to bonds, stocks, mutual funds and treasury bills.
Diversify your investments. Put in money in several types of investments. Diversification helps to spread the risk and maximize your profit potential. However, start with the safest investments like the money market mutual funds, treasury bills and bonds.
Also, your investment choice would be determined by your risk appetite and your age. The younger you are, the more time you can explore and take some calculated risks that can yield great returns.
However, some experts recommend the following:
According to time.com, If you are investing mainly for retirement, you should “own your age” in bonds. For example, a 30-year-old would have 30% of her portfolio in bonds, and 70% in stocks. A more risk-taking version of this rule says to hold 110 or 120 minus your age in stocks. In that case, a 30-year-old would have 80% or 90% in stocks, and then gradually switch to bonds over the years.
Also, money.usnews.com, advises traditional 60-40 equities and fixed-income portfolio strategy model. The site maintains that, the 60 percent allocation to stock provides investors a clear path to stock market gains, while the 40 percent allocated in bonds can cushion any stock market downturns.
The best time to plant a tree was 20 years ago. Another best time is today. Start now to invest gradually with the little funds that you get from time to time.
Always be on the lookout for new, better and safe ways of growing your wealth legally.
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