How Do Bond Investments Work?

By

-

September 19, 2019

As you start investing and building your wealth, you will at some point consider investing a portion of your money in bonds. So, if you have ever asked yourself, “What Is A Bond” and “How Do they Work?”, then keep reading. I wrote this specifically for you to answer these core questions about bond investing.

Therefore, following post is a basic overview of what bonds are. Specifically addressing: how bonds work; who (and by whom) they are issued; what makes bonds attractive investments; and some major considerations you’ll want to factor into your decision before allocating capital to bonds or similar income securities to your portolio.

What Is A Bond?

In the simplest terms, a bond is a loan made to a company or government that pays back at a fixed rate of return over a specified time frame.

For instance, a KES. 100M goverment bond with a 10-year maturity date and a coupon rate of 12% would pay KES. 12,000,000 a year for a decade, after which the original KES.100M amount (face value) is paid back to the investors. Since, bonds provide regular payment over a specified period, say KES. 12M a year, they are commonly referred to as fixed-income securities.

Here is a the simple math underpinning the above example assuming that an investor that invests KES.500,000 into the bond mentioned above:

Key measures for assuming a KES. 500M bond investment

Fixed Rate = 12%
Annual Interest = KES. 60,000
Payment Frequency = yearly (to simplify the math, usually the Kenyan goverment bonds may pay quaterly or semi annually)
Payment Value = KES. 60,000
Total interest for the bond held for 10 years = KES. 600,000

Period	Principal	Coupon Payment	Investors Balance
Now	(KES. 500,000)*
Year 1		KES. 60,000	KES. 60,000
Year 2		KES. 60,000	KES. 120,000
Year 3		KES. 60,000	KES. 180,000
Year 4		KES. 60,000	KES. 240,000
Year 5		KES. 60,000	KES. 300,000
Year 6		KES. 60,000	KES. 360,000
Year 7		KES. 60,000	KES. 420,000
Year 8		KES. 60,000	KES. 480,000
Year 9		KES. 60,000	KES.540,000
Year 10	KES. 500,000**	KES. 60,000***	KES. 1,100,000

*initial payment, investor buys the 12%,10-year fixed-income bond.

**final payment, the issuer pays back the pincipal with the final coupon rate.

***final coupon payment

The Different Types of Bonds & How They Work

The exact details of a bond vary with each bond.

A bond is simply a contract written up between the issuer (borrower) and the investor (lender), whereby any legal provision upon which they might agree could theoritically be put into the bond indenture (bond contract).

In broad terms, over time there have been certain ordinary customs and patterns that have emerged over time, where the following types of bonds emerge:

Sovereign Bonds

Sovereign bonds are bonds issued by a sovereign goverments, in this case Kenya. These could be treasury bills, bonds and notes which are backed by the full faith and credit of the country, including the power to tax in order to meet its constitionally required obligations.

Additionally, governments often issue special types of bonds aside from the usual to meet a specific mandate or need. For instance, the EuroBond or Infrastucture Bonds (like M-Akiba), are special types of bonds. We also have agency bonds like the infrastructure bonds. They are issued by goverment agencies with the assumption that they are fully backed by government itself and often offer higher yields.

Municipal Bonds

Municipal bonds are bonds issued by the local goverment like the KES.5B county bond issued by Laikipia County. These bonds tend to be tax-free for two main reasons:

In order to allow local goverments to enjoy lower interest rates that would otherwise have been high, thus freeing up money for other county projects;
And to encourage investors to invest in civic projects that improve civilization such as funding roads, bridges, schools, hospitals and more.

Corporate Bonds

Bonds issued by corporations, partnerships, limited liability companies and other commerical enterprises, and often offer higher yields than other types of bonds. However, the tax for these bonds isnt favorable. Investors may part with upto 10%-25% of total interest income to Kenya Revenue Authority (KRA).

Examples of Corporate bonds with NSE ):

Bond Issuer	Issue No.	Issue Date	Maturity Date
KENGEN PUBLIC INFRASTRUCTURE BOND OFFER 2019	FXIB 1/2009/10Yr	2009-11-03	2019-11-01
CONSOLIDATED BANK OF KENYA LTD MEDIUM TERM NOTE	CON.BD-FXD(SBN)/2012	2012-07-31	2019-10-23
CONSOLIDATED BANK OF KENYA LTD MEDIUM TERM NOTE	CON.BD-FXD(SN)/2012	2012-07-31	2019-10-23

Major Considerations of Bond Investing

There are various major considerations of bond investing that you need to factor in before allocating capital to fixed-income securities to your portfolio. These considerations include:

Risk i.e. how much risk can you handle?
Allocation i.e. how much to allocate to bonds and other investments.
Diversification factors for your portfolio.

Q. What Are the Main Risks of Investing In Bonds?

Risk is one major factor in bond investing.

Though bonds are generally considered less risky then stocks, they do have their own elements of risk which include:

Credit Risk

Credit risk is essentially the probability of not receiving your initial (principal) investment or interest back at the contractually guranteed time due to the issuer’s inability or unwillingness to do so. Credit risk is managed by sorting bonds into groups based on likelihood of default. Ranging from investment grade bonds to junk bonds.

This rating is conducted in the international bond market by the independent agencies: Standard & Poor, Moody’s Investors Service and Fitch Rating Inc. These agencies tend to rate higher bonds with a low chance of default, as it is assumed that the lower the interest rate the lender will recieve the lower the chance of default.

Typically, investors are more than willing to pay a higher price for low risk bonds as measured by various financial ratios such as number of fixed obligations covered by net earnings of a company, cashflow or interest coverage ratio. Companies that are doing well and have high net earnings, healthy cashflows and high interest coverage, thus have a better rating and also tend offer lower interest.

Inflation Risk

This is the chance that the government of a given country will enact policies that may lead to a widespread inflation. For example, should the Kenyan government agency increase fuel prices, the general cost of living will increase as well.

A higher rate of inflation will destroy your puchasing power and thus rendering your principal insufficient by the time you get it back at maturity of the bond. This is why certain bonds have built in protection or variable rates to reduce the risk of holding such a bond.

Liquidity Risk

Bonds are less liquid than a majority of stocks, this means that once you get them, you may have a difficult time selling them at a good price. This is the main reason why it is always best to restrict the purchase of individual bonds for your portfolio to bonds you intent to hold until they mature.

To provide a real-life illustration, lets take a look at the bond statistics on the NSE.

Assume we held the bond, FXD 1/2013/10Yr, which is a 10 year bond issued in 2013, maturing in 2023 whose and priced at 109.6710 as at 12th September, 2019. If we put out a bid request to sell this bond, the best price we would probably get is 107.7630 (which is the price on 13th Septepmber, 2019). At this price, it would be unwise to part with the bond.

This price spread in bonds isn’t unsual and that this why it is always best to trade bonds in larger blocks that smaller ones in order to get better bids from large insitutions.

Reinvestment Risk

When investing in bonds, there is always the risk you will not be able to reinvest the interest income paid regularly (as offered by some bonds). This may be so if interest rates have dropped considerably, and thus you will have to place your interest income to work in bonds with lower returns that you had been enjoying before.

Therefore, because you cannot predict ahead of time the precise rate at which you will be able to reinvest the money, reinvestment becomes a risk the investor needs to contend with.

Q. How Much of Your Portfolio Should Be Invested In Bonds?

Knowing what is the proper bond asset allocation you need for your portfolio will be based on how much risk you can handle. The basic rule of thumb you can use (if you feel it fits your situation) is for:

Retirement, “own your age” that is if you are 30 years old, invest 30% of your portfolio in bonds and 70% in stocks.
A risk-taker, hold 110/120 minus your age in stocks and the rest in bonds i.e. 80% – 90% in stocks and gradually, shift your portfolio to bonds over time. This strategy assumes that as a young investor, you have time to recover from losses in the stock market and thus can take advantage of the higher returns offered.

Overall, there are guidelines and then there is you. Determining the allocation of your portfolio involves many factors such as how long you intent to invest for, your risk tolerance, your financial future goals, perception of the market and also income.

What is A Bond Fund?

A bond fund is a pooled structure (either traditional mutual fund or EFT) that invests in bonds and other debt securities. Typically, bond funds pay periodic dividends that include interest payments on the funds invested in the various securities plus periodic realized capital appreciation. Investors who don’t want the hustle of investing in individual bonds but still want to hold fixed-income securities in their investment portfolio, tend to invest in bond funds.

Why Should You Invest In Bonds?

If you have a large cash reserve far in excess of Kenya Deposit Insurance Corporation (KDIC) insurance requirements, the best place to park the funds, is in treasury bills, bonds and notes.
Bonds offer a predicable return and tend to outperform the stock market in certain economic cycles.
Bonds are better than a bank as they offer better rates.

Key Things You Need to Know

Government bonds are generally considered the safest investment. They are backed by the full faith and credit of the goverment.
A bonds interest rate is tied to the creditworthiness of the issuer. Thus great companies offer lower interest while as sketchy ones will offer higher interest rates. This is because of the increased risk that the company may fail before paying off the debt.
Bond funds are very volatile because they do not have a fixed price or interest rate since they invest in many different types of bonds of different types.
It matters how long you hold a bond for as bonds are sold for a fixed term. Therefore, should you sell your bond before its maturity date, you run the risk of not making back your original principal investment.
Bonds tend to lose market value when the market interest rate rises as the resale value of an older bond stuck at a lower interest rate becomes unattractive to investors.
Avoid investing in foreign bonds whose inherent risk you do not understand.

Image credit: Top by Rawpixel via Pexels.

With the knowledge of bond basics under your belt, read on to learn more about:

- Advertisement -

How Much Life Insurance Do You Actually Need?

By

Irene Makanga

-

September 5, 2019

0

Many amongst us hate the idea of buying life insurance and consider it a waste of money. Afterall, we all hope to live a long fulfilled life and amass enough money in the interim to retire well, adequately provide for our families and perhaps leave some when the time comes.

Unfortunately, life happens as it always does and a lot doesn’t go as planned – as the old adage goes “Man plans, and God laughs”. Essentially, there is no absolute way of knowing what lies ahead. Life is life and happens as it happens.

Therefore, for families left behind, an adequate life insurance policy may make a great difference in their lives. Life insurance lightens the load – just a little, as it may be the only thing that is preventing personal loss from being made worse by financial ruin.

So how do you know much life insurance you actually need? How do you get that number right?

Tally Up Your Resources

Your resources are your liquid assets and your after-tax income.

The aim of life insurance is to ensure that your family is catered for after a parent departs.

So, take up your monthly income and annualize it, then add up all your liquid assets to get your total assets.

Determine Your Financial Obligations

Determining how much life insurance you need comes down to what you need today to adequately cover all your current expenses today and in the future. This means that you need to take stock of all your daily expenses. The more thorough you are, the better you are able to predict how much life insurance you actually need.

Financial obligations = Expenses + Debt, and this is what you need to consider when computing your expenses and debt:

Expenses

Expense factors to consider are numerous based on personal preference and lifestyle. The following the large expense items you need to seriously factor in your cost estimates:

Raising a child
Caring for ageing parents and their medical expenses
Education – from high school to college.
Yearly expenses – add up monthly expenses and also, include a financial cushion (life insurance can also act as a financial cushion to cater for medical expenses and other discretionary expenses such as vacations)
Funeral – you can also factor in funeral expenses to lessen emotional toll for your family.

Debt

If you die owing people, your survivors will be responsible for your outstanding debt if they co-signed the loan with you. This means that they will bear the financial burden of all the debt they took with you. When computing how much life insurance you need, consider leaving enough to pay off loans especially if they are secured by collateral that your dependants need to use or inherit i.e. house or car.

Remember, that upon death, creditors may want to seize assets to recoup debt payments.

Other Considerations

Life insurance is a very individual thing to purchase and therefore, you need to make certain personal considerations before buying any life insurance:

Consider your age – the older you get, the less life insurance you need in financial terms. This because you will hopefully have less debt to add to your obligations and fewer dependents to support as you have already done the bulk of the work.
Consider your health – the older you get the higher the likelihood of death resulting in higher premiums. Life insurance is cheaper when you are young and healthy, thus you can get a larger coverage amount at an affordable rate. For these reasons (health and age) it is best to lock-in a good rate as soon as you have insurable needs.
Consider it’s affordability – a higher coverage amount means higher premiums. The exact price of life insurance tends to rely upon a number of individual factors including medical history, lifestyle, age and more. Discuss your needs extensively with your financial advisor and decide the best insurance terms for your needs.
Bonus consideration: After purchasing your life insurance policy and find that your needs have changed later on i.e. have more children or even taken on more debt, you can consider adjusting the coverage with a rider. This is essentially a provision to the policy that could come at an added cost and increase your coverage needs.

How Much Life Insurance Should You Get?

How much life insurance you should get is contingent on your coverage gap i.e. the cost your family needs to continue with life after you are gone.

Here is how you can estimate this amount using an example:

Resources	Amount
Income ( to annualize compute monthly income after tax x 12)	KES. 4,500,000
Liquid Assets (savings and paper asset investments)	KES. 2,000,000
Total Assets	KES. 6,500,000
Obligations
Five-year family support (yearly income x 5 years)	KES. 22,500,000
Tuition (assuming you have 3 kids, computed years to complete)	KES. 8,500,000
Funeral Expenses	KES. 300,000
Total Expenses	KES. 31,300,000
Debt Obligation
Mortage	KES. 5,000,000
Car Loan	KES. 2,500,000
Other Loans	KES. 150,000
Total Debt	KES. 7,650,000
Financial Obligation	KES. 38, 950,000*
Coverage Gap	KES. 32,450,000**

*Financial Obligation = Expenses + Debt

** Coverage Gap = Financial Obligation – Assets

For the sake of this example, the insurance coverage of this person is coming to KES. 32,450,000 – this is ideally the life insurance coverage this person should buy. However, don’t forget about the personal considerations we mentioned before – age, health and affordability.

Who Doesn’t Need Life Insurance?

There are alot of people in this country without life insurance and that is okay. Here are some instances where you might not need life insurance to get by in life:

Low-Income earner – most low income earners may find making payment for insurance premiums problematic. Therefore, for those in this category it is better to focus on building a savings nest first for immediate needs.
Single as a kite – no children or any other dependants.
Have group coverage provided by employers. If your employer’s group plan doesn’t work well for your needs, you may want to get an independent policy.
You are self-insured i.e. you have enough financial resources to cover any eventuality i.e. the fabulously wealthy amongst us or the comfortable retirees.

Overall

A life insurance policy needs to be sufficient and adequate otherwise, it would be either insufficient or wasteful. Using this formula, you can determine with a high degree of confidence how much life insurance is right for you. If you find this is too much hustle, another way to get a rough number of how much exactly you need is to aim for about 10 -12 times your yearly income as your coverage amount.

Image Credits: Top by Rawpixels via Pexels.

See Also:

Disclaimer: The information contained in our website, blog, guest blogs, e-mails, videos, programs, services and/or products is for educational and informational purposes only, and is made available to you as self-help tools for your own use.

- Advertisement -

How to Invest in Uncertain Times

By

Irene Makanga

-

August 29, 2019

3

INVEST: Uncertainty is the inability to forecast future events. This leads investors to sell off their investments in assets that they consider risky.

We live in uncertain times and markets around the world have become erratic as a result of actions and utterances of certain leaders across the globe. Here in Kenya, we have not been spared. Over the last couple of weeks, foreigners have been pulling out their investments locally, and internationally creating a sharp decline in the global markets. This is just a general picture of the underlying situation of what is really taking place.

As time passes, the markets around the world are increasingly become unusually uncertain, pointing to a looming recession. There is another school of thought in personal finance that moves away from the deterministic projection of your life, savings and investments. Afterall, life isn’t consistent and liner – doesn’t fall well on a graph. In it, we seek to invest more in ourselves and save for sure investment opportunities that will set us up for life.

So, here is how you can invest and take advantage of opportunities in uncertain times:

#1 Uncertainty Fund

Its always a great plan to plan for the worst and, patience during such times always pays off as great opportunities always come up. Setting up a fund to invest when prices are low is a very smart move to make. This way, you are sure to be catering for every opportunity that may come your way.

Remember that markets are always rising and falling. Dooms day/ recession scenerios will always come, and tend to recover within about five years. So, if you practice patience, plan well and invest for the long term – who cares. You can ride through the waves and emerge victorious.

#2 Buy When Low, Sell When High

The best defence in uncertain times is a well informed financial decision that is based on logic not fear. Usually, a good market isn’t one that does well; a good market is an expensive market. Thus, a bad market isn’t one that does badly; a bad market is simply a cheaper market. Uncertain times means that the market is generally very fearful and everyone is looking to pull out their money from various investments. This causes market prices of various assets to fall (and become cheap). Regardless of where your interest or strategy lies, you can’t go wrong investing over a longer period of time. Therefore, take well-informed decisions that will take advantage of the prices when things reverse back.

Never try to play the market because you have all these pros against you, equiped with legions of data and robo-advisors to help them make excellent decisions.

Real estate is a great opportunity during uncertain times as it has been known to be the least risky.

#3 Avoid the Market Noise

The aim of investing in uncertain times is finding value hidden within all the noise. The fall of the market can create excellent opportunities. Just avoid the sensational remarks and the politics that go with it all. If you look back historically, you’ll see that with every political turmoil, we have recovered and reached new highs too. So, don’t let the detractors and naysayers instil fear in your heart, instead stick to the basics. Find value in what you invest in, and invest for the long term. Remember that people tend to react emotionally to missed opportunities because of fear which leads them to sell and sell, while the market is already dropping. This means they probably don’t have much faith in their investments as their aim is to invest for the short-tem. As for long-termers, they will ultimately miss the recovery. If you have made a smart well-informed financial decision, trust your instincts.

Make The Move, Stay the Course

Afterall, as the common saying goes, there is nothing new under the sun. Markets rise and fall all the time, the idea here is to prepare for the right moment, the right opportunity, make the move and stay the course. For everything that falls must surely rise and everything that rises must surely fall – despite it, don’t let the short-term rises and falls scare you. The overall growth of assets is still on the rise globally.

Happy Investing!

Image credits: Top by Rawpixel via Pexels.

See Also:

Disclaimer: The information contained in our website, blog, guest blogs, e-mails, videos, programs, services and/or products is for educational and informational purposes only, and is made available to you as self-help tools for your own use.

- Advertisement -

What is your money personality?

By

Irene Makanga

-

August 8, 2019

0

Your money personality impacts almost every financal decision you make. Therefore, it must be the first step to determining your financial health. The way you handle money, whatever way that may be, can be helpful but also can block your progress to achieving your financial goals. More often than not, we cling to beliefs about money without even thinking about where they stem from or why we hold them.

Our personality may be based on our money history – up and until now, how have you been handling your money?

Experts have defined several money personalities types and below are some examples of the these various types:

Money Personality Types

Here are six different types of money personalities types – the saver, the spender, the secruity seeker, the risk taker, the giver and the flyer. These money personality types will help you understand your money habits and philisopies. This way, you can increase your chances of building wealth and get rid of habits that sabotage your chances in the first place.

See if you spot yourself amongst them.

#1 The Saver

Savers are big on saving that they forget to live a little.

You are a saver if you:

Get get excited about saving money and also, source out ways to get great dreals for something you wanted for less.
Are extremely organized, responsibile and trustworthy when it comes to money. Savers are very disciplined and won’t tap into savings to pay for anything that isn’t a need.
Rarely spend money outside your budget or shop impulsively. Savers typically scour the internet for great deals, plan thoroughly and make sure they have enough money on hand before making a purchase.
Typically avoid credit cards like the plague. Savers hate debt and paing interest, therefore pay off bills on time and in full right away.

With all this in mind, you will quickly notice that as savers can be quite a wet blankets. They are typically only focused on achieveing financial goals, obsessive about money and are generally quite cheap.

Tip for Savers: Allocate a small portion of your income to cater to purely guilt-free spending. Since a saver is the least likely to get into debt and have financial fuilfillment, it is imperative to intentionally plan for some excitement.

#2 The Spender

Spenders are all about living in the moment and tend to forget about tomorrow.

You are a spender if you:

Don’t think about the future and focus on the now. Spenders are willing to spend money to make life great and great memories today. Therefore, might have less money in the future.
Tend to buy things for others – giving gifts, helping others and treating others on the weekends is a spenders joy.
Get a kick out of spending – price doesn’t matter. It’s the fun of buying that counts.

Overall spenders can be quite impractical and impulsive buyers as they tend to go shopping without limits or even lists. They buy without a thought about their buying decisions or even research to find great deals. As such they tend to also be filled with regret about their thrills as they may end up with exorbitant bills afterwards or alot of wants catered to and little needs handled. Overall, the often always break the budget if they have one which can lead tem into serious, life-altering debt to cater for basic needs.

Tip for Spenders: Pay yourself first. Set aside 10-30% of your income before catering for your bills and other expenses. This way, you won’t mindlessly spend every shilling you earn.

#3 The Security Seeker

The security seeker is all about building wealth for secutrity. They are very careful and tend to be big on saving and taking up insurance.

You are a security seeker if you:

Are a great researcher and never invest in anything without doing thorough due diligence.
Typically very trustworthy and rarely risk it all. They won’t gamble their lifes’ savings or dig into their savings to invest in a multi-level marketing compnay.
Are willing to sacrficie in order to have a better future. Secruity seekers won’t spend money until they know they have put enough away to ensure that they are taken care of in the future.
Always prepared for anything. Security seekers always have a plan and contingencies for their plans hence, they rarely are caught up in a financial crisis.

Being a security seeker does come with its own set of challenges. Security seekers can be overly negative by nature. They get quite nervous about taking financial risks and so they will say “no”, alot or get stuck researching options. As such they can be very controlling and always want to foolproof every opprounity. They are also unwilling to explore their own financial dreams. Their need for security ultimately becomes all-consuming, strifles their creativity and thus hardly look for alternative possibilities for their future.

Tip for Security-Seekers: Keep reminding yourself that life is more than just amassing wealth – it is also about living richly in values, most important of them is family.

#4 The Risk Taker

Risk-takers are get a kick out taking risks with their money – not the potential huge payout at the end of it. They are always willing to risk it all.

You are a risk-taker if you:

Are always seeking out the next great oppourtunity. For risk takers no idea is too big or too abstact for them. Their sense to explore their financial dreams is what draws them in.
Trust your instincts. Which helps them alot when a deal doesn’t feel right and with the same breath, if it feels right they are all over it.
Are conceptual thinkers and thus aren’t worried about the details and therefore, aren’t hung up on how something is being done. Once they get weed of a new oppourtunity – business, investment, real estate – they get on it quick.
Aren’t afraid of making decisions and hope onto the next big idea as quickly as they can. In a perfect world of money, this can be a great positive since time and timing is everything.

As much as risk takers have a great sense of adventure, they are also quite vulnerable to cons and scams. The thrill of the deals and the desires for wealth create a bad combination that blinds them to the possibility of loss. Their impatience and decisiveness further compounds this risk as risk takers like to make decisions without consulting, weighing the impact or considering other peoples feelings.

Tip for Risk Taker: Stop and seek out a second and third opinion about any investment you make. In everything you do, investigate a little before betting your life on it.

#5 The Giver

Givers believe that their is a fixed amount of wealth to go around. Therefore, they will give and give because they believe they have more than others.

You are a giver if you:

Genuinely enjoy helping others and being charitable. This stems from an internally held belief that they have too much money than others don’t have enough, also refered to as the Fixed-Pie Fallacy.

Being generaous is a great quality but then when its over done it can serious hinder your chances for achieving your financial goals.

Tip of the Giver: Focus on getting your financial foundation set before starting to give away your money. Also seek to automate transfers to move a set percentage of your income to designated charity accounts every month. This way you can give without compromising your own financial goals.

#6 The Flyer

Flyers are simply clueless about money and believe they dont have what it takes to handle their own finances.

You are flyer if you:

Are generally content with life. It doesn’t matter what station of life they are in, flyers don’t care as long as they are independently making their own choices and are happy.
Often put relationships and connections above money.
More than happy to delegte money responsibilities to someone else who enjoys making money decisions.
Aren’t motivated by money and thus end up living exactly the lives the want. Flyers make decisions based on what they want not what will make them the most money.

Flyers tend to not really not think about money which unfortunately is a big part of life. Therefore, flyers also tend to simply react to life’s challanges as they won’t pay attention to bills or their own looming retirement. As such, when flyers make decisions it comes from a place of fear because they feel inadequate in skills needed to solve money issues. This may make them seem unresponsible but they are actually hardly ever think about money issues hence, they don’t plan.

Tip for the flyer: Find someone to keep you accountable for your money such as a spouse, business partner, or a personal accountant to help you keep track of your money.

Do you spot yourself?

If you see yourself in any of these money personality types, make a plan to build on your strenghts and subseqently balance out your weaknesses. If not, ask a friend, spouse or simply someone who knows you very well, to help you identify your money personality. They are more likely to spot it more clearly from the outside what you do not see.

Image credit: Top by Godisable Jacob via Pexel.

See Also:

Disclaimer: The information contained in our website, blog, guest blogs, e-mails, videos, programs, services and/or products is for educational and informational purposes only, and is made available to you as self-help tools for your own use.

- Advertisement -

10 Money Mistakes to Avoid in Your 20s

By

Irene Makanga

-

May 23, 2019

0

A decade of unfocused financial habits and money mistakes will eventually take a toll.

Your twenties can be a great time full of tumultuous moments and decisions that I hope you’ll learn from, particularly about money. I mean so much is happening with your financial situation, from dating to getting married, getting an education, your first job and discovering the things that make your heart quiver (expensive hobbies).

For many people, their twenties will be the first time they get a true taste of independence and dealing with money.

So what should you do with your money during this time? The financial decisions you make in your 20s will have an impact on your 30s and beyond. Therefore, to survive your twenties you need to live well below your means to really get yourself set up for life.

Here are 10 very common money mistakes that if avoided, can help you sail into your next decade a little more smoothly. The biggest money mistakes I have noticed that twenty-somethings have made, including myself are:

#1 – Failing to Plan

Failing to plan, is planning to fail. Cruising through life without a plan is like sailing into the open ocean without a compass.

A good financial plan is absolutely necessary to give you direction and define what you want out of life. Great plans also help you maximize your income, help you invest smartly, and avoid unnecessary taxes every year. Invest some time every year working your financial pan, and also study up to brass up your money skills.

#2 – Taking On Debt to Finance Lifestyle

Being saddled with credit card debt when you’re just starting out is going to put a strain on your finances for a long time.

If you are in your twenties, you really don’t need a fancy car and therefore, don’t need to borrow to buy a car. What you really need is a reliable fuel-saving vehicle. It is also okay not to be able to afford a car immediately. You can still use matatus, ubers, boda-bodas or even carpooling.

And when you find the love of your life and want to tie the know, remember that weddings are just one day. So come up with a budget and look at your options carefully before getting yourself into long term debt to finance your big day. The last thing you want to do is ruin your memory of that day with regret of debt for years to come.

In your twenties, simply avoid overpaying and overspending on anything that isn’t a necessity. Buy a car that you can afford and have a wedding that won’t leave a bitter taste in your mouth. Else, at the end of the day, you won’t be able to eat and pay insurance or pay back debt too.

#3 – Forgoing Insurance

When you are young and seem healthy, you hardly give a second thought about your health status. I mean you rarely visit the doctor’s office, so why do you need to get some health insurance. However, the expenses of any medical emergency can quickly add up and leave your broke to the point you’ll need a pay bill number to save your life.

As Kenyans, we are very kind and generous beings, who are always there to support each other. That doesn’t mean you should live your life as though you are invincible. You can either learn now or plunge yourself and your family into debt with medical emergency costs.

So get yourself covered as much as you can. Take out insurance for your health, life, property. Get the best competitive rates, budget and properly insure yourself and your property.

#4 – Failing to Save

A lot of people in their twenties are harbouring financial lies that cloud their reality about their own money habits and financial situation. It is easy to tell yourself that your ‘future self’ will take care of this and that i.e. saving and debt. So you just choose to live in the present and brash everything under the proverbial rug.

Don’t avoid creating an emergency fund should you suddenly lose your current source of income, get sick, have a child or even have your car break down. Strange things happen when you choose to live in a glass house.

So take time out today and give yourself an honest assessment of your own financial situation and build on that.

#5 – Putting Off Saving For Retirement

Saving is a crucial aspect of your journey to financial security. Putting off saving now is setting you back years to financial security.

You probably think that you are only in my twenties, why so why do you need to think about saving or retirement when you don’t even have enough income. I felt the same way and as a result, I lived from paycheck to paycheck in my first year of employment. NSSF ways the only way I for retirement because it was mandatory. I didn’t start seriously saving until much later. Postponing the decision the save for yourself will work against you later. That’s just how the math works – the earlier you start, the more time your money has to grow into a healthy fund that will adequately sustain you in old age.

It all boils down to one simple fact: Start early and retire rich.

At the end of the day, you cannot adequately predict what the future holds for you but with proper planning, you can prepare for it. The rule of thumb is to try and save between 10% -15% of your income for retirement, starting in your 20s. The later you start, the more you have to put away.

#6 – Wasting Time

This is a big one. Even for me.

Your twenties is the time to get a headstart in life because its the time you’ll have the most time and energy to run around and get things done. The habits you develop now in terms of saving, earning, spending and debts you incur, will have an impact on you well beyond your 20s.

So instead of binge-watching Netflix, put your extra time to earning form extra money and make lucrative income with side hustles to earn extra spending cash. This way, you can put away more for the things that are important to you i.e. buying an apartment or starting a business.

#7 – Avoiding Taking Risks

The 20s are for messing up and living it up. It is time to grab opportunities and sees where life takes you.

Not taking calculated risks in your twenties seriously reduces your chances of living your best life later. As when the kids, married or other things come along, you won’t have that opportunity with all those responsibilities. So start. Take those smart risks early like starting a business, moving to another country, getting an education in your chosen career etc.

#8 – Not Building A Good Credit Score

A great credit history is important when applying for a loan to buying a car on loan, mortgaging property (apartment, home and land) and more, or applying for a credit card. Building a great credit score involves a lot of practice in keeping good creditworthy habits such as:

Making your payments on time
Borrowing well below your limit
Maintaining a healthy balance on your credit card (30% of your credit limit)

With all these loan apps, things can get really bad for you real quick in your twenties. So take the time to build a great credit score and also check it as often as possible. Banks tend to use credit scores as a measure of your overall financial health. So, take care of it. Avoid getting blacklisted by the credit bureau as this can seriously hamper any plans you may have for personal financial growth. I cannot stress this enough.

#9 – Allowing Expenses & Debt to Balloon

This is a common money mistake – allowing expenses and debt to balloon with time.

Any debt you take on must be repaid and any increase in unwarranted expenses is stealing from your future. These things will extend the time you’ll take to achieve financial security. Remember the less you borrow the less you’ll have to pay later and the less you spend, the more you can put towards achieving financial security.

As much as you can, try to maintain low expenses in your twenties and save as much as possible. This also means, try not to borrow as much. If you do, make sure you pay off the debts that are charging you the highest interest. This kind of debt is what we consider bad debt and it does not help your financial situation at all.

Overall, maintain low expenses and debt in your twenties.

#10 – Doing Life Without A Financial Plan

How much does it cost you to live the lifestyle you are currently accustomed to?

And, how much will it cost you to live the lifestyle you are working so hard to achieve in let’s say 10 years?

If you have no idea, then what are you really working towards?

Building wealth and financial security don’t just happen miraculously. These things take time and effort to create. Like everything we do in life, you need to plan for this too. A financial plan puts everything into perspective and sets parameters of your budget and targets on which to focus on.

So if you want to buy a house, pay off debt, build a business, save for a car and also put away some money for retirement, you’ll need to sit yourself down and come up with a plan.

Image credits: Top via Gratisography by Pexels.

See Also:

Disclaimer: The information contained in our website, blog, guest blogs, e-mails, videos, programs, services and/or products is for educational and informational purposes only, and is made available to you as self-help tools for your own use.

- Advertisement -

5 Things You Need to Know About Estate Planning

By

Irene Makanga

-

May 16, 2019

0

Estate planning can save your family alot of headache and heartache.

A great number of Kenyans don’t have a will and choose to leave things to chance. As a financial planner, I’ve seen my own share of sad and unfortunate things happen over the years. Not having proper estate documents can leave loved ones out of inheritances, paying hefty unnecessary tax bills or leaving the family to battle it out in probate. Worst case scenarios, they kill each other over it.

The process of estate planning essentially deals with the preparation of all tasks that serve to manage an individual’s assets in the event of his/her incapacitation or death. It is important to have an estate plan in order to avoid devastating consequences for heirs such as:

Children being left helpless with no one to take on guardianship
Wealth falling into the wrong hands
Hefty tax bills rise as a result of the transfer of assets
Division of families and endless squabbles, which may end up in endless court battles

Here are 5 things you need to know about estate planning, particularly beneficiary designations. Some of them you probably know but others you most probably never knew about estate planning.

1 – Naming A Beneficiary

Always name a contingent beneficiary on financial accounts, especially retirement and insurance policies. This is the best way to deal with your own mortality whether you are ready to face it or not.

Your personal estate has no life expectancy. Instead of leaving your family in ruins, give your family the comfort to stretch out wealth and maintain the family after your death. Naming a beneficiary and having a will cost you less than the ligation that will come after your demise. Having no beneficiary on your accounts, especially retirement, can leave your estate in endless probate, in the hands of creditors or in the hands of government at the unclaimed assets bureau.

2 – Naming A Guardian

Ensure you name a guardian for your children very early on. No one imagines they will die young but, as a parent, you need to be ready for the unthinkable.

In order to ensure that your children and well-taken care in the way you would like, ensure that you name a guardian. A guardian will not only take good care of your children and also manage the assets on behalf of your children until they are of age. Save your child’s/children’s future by having raised by someone you trust and the money managed by a responsible adult who has their best interest at heart.

3 – Handling Death of A Beneficiary

Always plan for the death of a beneficiary. If one of two beneficiaries dies, where will your money go?

Who you pick is very important because you could potentially disinherit your grandchildren by picking the wrong option and leaving everything to another beneficiary and their family. In short, are you leaving your assets per person named as beneficiaries or lawful children equally?

4 – Including A Residual Clause

A residual clause caters for everything you didn’t specifically name in your will or forgot to include.

This includes things you didn’t own at the time of writing the will or things you don’t know you might own. It is advisable to review your will every three to five years (or on a major life milestone) so as to always try to keep it as current as possible by catering for any new family members, divorces, sold and/or newly acquired assets.

5 – Planning For The Unexpected

Life is by definition very unpredictable.

It is wise to plan for the unexpected twists that may come your way like the decline of your spouse’s health, the divorce of your kids, kid’s creditors (children can waste away your wealth when they are not responsible) and other multitudes of unforeseen.

The most common way to address this is by having assets put in a trust where you can control how, to whom and when money is distributed to the heirs. Trusts are a great way to distribute wealth without an outright inheritance through a will. The last thing you want to do is to give children or grandchildren wealth they are incapable of looking after because they have a gambling addiction, drug addiction or are heavily in debt.

Simply Put

If you want your legacy to remain and stand the test of time, you will need to plan your estate. Protect your wealth and family with a last will and testament. Without one, your heirs may have large tax burdens, the courts may have the last say who gets what, especially when boils down to who takes on the role of guardian to your precious children.

Image credits: Top by Cytonn Photography via Pexels.

See Also:

Disclaimer: The information contained in our website, blog, guest blogs, e-mails, videos, programs, services and/or products is for educational and informational purposes only, and is made available to you as self-help tools for your own use.

- Advertisement -

5 Amazing Personal Finance Apps that Make Life Easy

By

Irene Makanga

-

May 9, 2019

0

Technology is here to make life easier and there are so many personal finance apps out there to do so. Whatever you and your hard earned cash need, there is an app for it. These apps will help you run the whole personal finance mile from budgeting, tracking, making payments, setting goals, saving and investing.

If you use any of these personal finance apps, let us know what you think about them by commenting in the comment section after this post. Here is a complication of five amazing personal finance apps that will make your life and personal financial planning much easier.

*The selection of these apps is based on personal and client experiences.

1 – CBA’s Loop

CBA’s Loops is an amazing digital financial planner that will help you reach your goals, grow your savings and remain financially stable. It offers you the opportunity to budget your income, monitor spending habits, set multiple goals, save money to reach those goals, earn interest on savings and get personal loans of up to KES. 3M. Aside from just saving and investing through Loop, CBA has ensured that customers get the best rates in the market while also choosing when to get a payout.

Due to its simplicity and convenience, there are n more excuses for not going for that vacation, buy a new house or whatever your goals are.

Rates & Costs:

Pay bills using Loop for services such as cable bills, power bills, government bills such as parking fees, land rates or business permits, will cost about KES 44 per transaction.
Investing using Loop will enable you to earn 70% of the CBR rate, with a break or no break option on savings. Upon maturity, your funds will be deposited back into your Loop account.

Read more on CBA’s Loop rates and costs from their tariff guide here.

Why it’s great: You can do everything with Loop – budget, pay bills, track, save, earn and even borrow. What more do you need from a financial app?

2 – Wally Next

Wally Next is a great app that helps you set financial goals, set savings targets and really keep track of where your money goes. It’s really amazing what this app does, considering that it’s free. Particularly, it’s great for those who are clueless about personal finance. For those who are not sure how much they actually spend every month or always coming short, and sinking into short-term debt to fund lifestyle habits. Wally Next allows you to keep detailed records of all your expenses, making it easier for you to identify where your money is going.

Why it’s great: If you are keen, Wally Next helps create more accurate budgets.

3 – Good Budget

It is considered one of the best personal finance apps for those keen on tracking their income. It allows you to set budgets, allocate money to different budget items, track your budget and keep it all in check. This app displays everything in charts and helps you make better financial decisions. At the end of the day, its all about getting on top of your income, spending and savings.

Why it’s great: Good Budget utilizes the envelope system – which is essentially budgeting using the cash-only system where you divide your money into digital “envelopes” or categories based on expenses.

4 – Expense Manager

Expense Manager (by Bishinews) is a great app to track your expenses. It is full of features that set it apart from most of these other personal finance apps. Aside from tracking expenses, the app also allows you to create a budget, organize bills, track spending, create reports, calculate loans and more.

Why it’s great: Expense Manager is a great app to help you really tame your budget. It will reveal your financial weaknesses and strengths too.

5 – Branch

Branch is one of those great lending apps that you wish did more. I feel its a great app for those looking to grow themselves not just fund an exorbitant lifestyle. The app enables users to have access to larger loans and reductions in interest depending on their payback time. Who wouldn’t love that?

It has limits though, on the amount you can actually borrow at any particular time.

Why it’s great: Your diligence is rewarded with a higher loan limit, and lower interest on borrowing.

Ultimately

There are very many personal finance apps out there that can help you get your life in order. If you are clueless about personal finance, start by managing your expenses with a great money management app. From there, grow your savings using the different investment strategies out there into great sources of passive income.

If you are already using a personal finance app, please share with us some of your favourites. Help someone else discover too by commenting below.

Image credits: Top by Raw Pixels, via Pexels.

Other related:

Disclaimer: The information contained in our website, blog, guest blogs, e-mails, videos, programs, services and/or products is for educational and informational purposes only, and is made available to you as self-help tools for your own use.

- Advertisement -

How to Save Money in 14 Painless Ways

By

Irene Makanga

-

May 2, 2019

0

Haba na haba hujaza kibaba. Every bit counts.

I am one of those people who live well saving with the small stuff but splurge it all in one go beyond what I planned. In my mind, the little things add up quickly and allow me to splurge on the big stuff like collectable items, vacations and such.

Generally speaking, saving money does not have to be hard or painful, but sometimes, it can really take the life out of you. However, there are some painless ways to save money – that are easy and fun too. You really don’t have to miserable.

If you have any questions about these tips, feel free to shot me an email or continue the discussion in the comment section below.

Meanwhile, here are my 14 ways to save money painlessly.

1 – Switch Banks

If you feel you are paying too much in banking fees, then consider switching to a different bank with better interest rates, lower fees and better customer benefits. So if online banking is a priority for you, then consider getting it free and also, ease of depositing and withdrawing money if its important to you.

2 – Pack Lunch

How much do you spend on lunch at work every day? How much would you stand to save if you packed your lunch a few days a week, rather than buy it? If the numbers are right, then consider packing some lunch a few days of the week and save a little more for those elusive financial goals.

3 – Eat at Home

This is a big one. Especially for those of us who are busier than ever and cooking meals at home seems like a waste of precious time. However, home-cooked meals are healthier and much cheaper than eating out or getting take-out. So, consider eating healthier at home and saving some coins. It’s a win-win situation.

4 – Save the Planet

By reducing your own ecological footprint, you can save a lot of money. You can consider:

One, ditching water bottles. For me, this is it. I am big on keeping the environment clean. Always trying to reduce any negative impact I may have on the environment while going about my day to day activities. So getting a reusable water bottle and refill it, is a great way to reduce your plastic waste and also save some money.

Two, walking or riding your bicycle to close locations such as the store, than driving your car. Save on fuel and save the planet.

5 – Improve Credit Score

A good credit score can save you a lot of money in interest on any bank loan you get from a home loan, a car loan, business loan to even credit cards. If you have never focused on your credit score before, work on improving it and then refinance your current debt to save big.

Read more on credit scores: How To Build A Good Credit Score

6 – DIY

Doing something yourself can save you significant amounts of money over time. For instance, instead of buying those baked goods you love, consider making them yourself from scratch. You can also do basic home repairs yourself – no need to call the plumber for a clogged toilet or sink.

7 – Plan Major Purchases

Throughout the year, you may have major purchases to make and planning them will allow you to take advantage of the year sales. For instance, if you are looking to buy a new car – you can start sending work out about your intentions to buy. Who knows, you might find someone willing to sell a great car at a great bargain.

Also, you can always make your next Christmas gifts list at the beginning of the year. Buying throughout the year can help you take advantage of the years offers and feel less pressure during the holiday season. This way, you can save a small fortune from this.

8 – Shop Online

If you can, try to shop online and save on fuel. Online shopping also allows you to take advantage of great deals than purchasing in store.

9 – Unplug Appliances

If you are not using your appliances, turn them off and save big on your electricity bill. We all know how runaway the Kenya Power bills can be, so let’s not give them space to spruce up our bills. To save even more, only purchase appliances consider the energy cost before buying. Although more efficient appliances cost more, you can make up on the cost over the life of the product in saved electricity bills.

10 – Reconsider Communication Needs

Here we are talking about the internet, phone and even TV needs. Try and manage your expenses or consider switching to another service provider. Luckily, we have many service providers in Kenya – competition is healthy. Though they are not built equally, they get the job done.

11 – Don’t Pay Interest on Credit Cards

This is obvious but many of us fall into the trap of not paying off the credit card in full. We fall into the temptation to spend more than we can pay on the credit cards in the first place. Credit cards are good, but if you can’t adequately manage to pay off the credit in full, consider getting rid of it. If not, the high-interest payments will start to eat away at your monthly budget and pull you into debt.

12 – Haggle

Dare to haggle and negotiate for a better price. Businesses are willing to offer concessions to get a new client or simply retain one. Take advantage of that.

13 – Exercise at home

You don’t even have to worry about how you look soaked in sweat and every muscle is throbbing. Consider kicking that gym membership and put on a workout video on Youtube. If the weather is great – go outside and get some workout in. On weekends, you can take your family for a walk or bike ride at Karura Forest or Arboretum – it costs almost nothing and gets everyone’s heart pumping and health.

14 – Ditch Insensible Friends

Last weekend, a friend posted that she is fed-up of her male friends who keep asking for contributions for their Ruracios. This is a big thing nowadays, whereby people are hell-bent on creating Instagram worthy events and ceremonies at the expense of their friends. So, if you can’t meet their demands, don’t bend over backwards to do so. Just walk away and love them in other ways.

Image credits: Top by Eric Anada via Pexels.

Other related:

Disclaimer: The information contained in our website, blog, guest blogs, e-mails, videos, programs, services and/or products is for educational and informational purposes only, and is made available to you as self-help tools for your own use.

- Advertisement -

5 of the Most Interesting TED Talks About Money

By

Irene Makanga

-

April 25, 2019

0

There are plenty of resources out there about money, from podcasts, books and blogs by money gurus that will get you acquainted with the basics about money. Personal finance matters are quite complicated, and there’s far more than just tracking budgets and balancing cheque books. Since life and personal finance are not mutually exclusive, to master your personal finance also means mastering yourself.

I have rounded my top 5 most interesting TED talks – all between 3 to 20 minutes long- that will change the way you think about money and how you put it to use.

In no particular order, here they are:

1 – Psychological tricks to help you save money by Wendy De La Rosa

Why it’s a must watch:

Wendy De La Rosa does a great job at breaking down the behavioural roadblocks that prevent us from saving money and thus shifting our perspective about it.

My favorite quotes:

1. The number one purchase people say they regret, after bank fees, is eating out. It’s a frequent purchase we make almost every day, and it’s death by a thousand cuts. A coffee here, a burrito there…it adds up and decreases our ability to save
2. We aren’t machines. We don’t carry around an abacus every day, adding up what we’re spending, in comparison to what we wanted. But what our brains are very good at, is counting up the number of times we’ve done something. So I gave myself a limit. I can only use ride-sharing apps three times a week. It forced me to ration my travels.

2 – This is the side hustle revolution by Nicaila Matthews Okome

Why it’s a must watch:

Nicaila Matthrews Okome changes your perspective about side hustles and highlights why they are great.

My Favorite Quotes:

1. People are multi-passionate. I want to stress that not every side hustle is started because someone hates their job. Many are started simply because people are interested in lots of different things. Lisa Price, who started a hair and beauty company, Carol’s Daughter was working in television production when she started side-hustling. She says she actually loved her job. It was the fact that she came home every day feeling good that led her to start experimenting with making fragrances and hair oils in her kitchen
2. We are always taught that we’re supposed to know what to do when we grow up. But, when you are multi-passionate you want to dip and dabble in those different things. It doesn’t mean that you’re not committed to your job, it just means that you have other outlets that bring you joy.

3 – An honest look at the personal finance crisis by Elizabeth White

Why it’s a must watch:

Elizabeth White opens up an honest conversation about living the fake life riddled with financial troubles that we may face and offers practical advice for how to live a richly textured life on a limited income. Highly relatable and quote surreal considering the age and economic difference.

My Favourite Quotes:

1. A friend told me that I am broke not poor, and there is a difference.
2. The cavalry’s is not coming. There is no big rescue, no prince charming, no big bailout in the works. To have a shot at something other than being old and poor in America, we’re going to have to ourselves and each other.

4 – Financial Literacy: Mellody Hobson TEDMIDWEST

Why it’s a must watch:

Aside from the fact that I totally love this woman – she is simply amazing and extremely motivational for me. Mellody Hobson shares four quotes which most impacted her life with beautifully woven personal stories of her own.

My favorite quotes:

1. As women, we are raised to have rescue fantasies and I’m here to tell you no one is coming”…I read that quote and I said to myself what if from this day forward I led my life as if no one were ever coming. That if I’m all I’ve got, what kind of decisions would I make and how would I do things differently.
2. I think about especially today all of these individuals who are risk-averse. They don’t want to take risks. They have their money sitting in cash which is basically making nothing or they say I’m scared of the stock market and I don’t want to invest. By being scared they actually lose out over the long term because over the long term the stock market has outperformed all other investments.

5 – A Rick Life With Less Stuff by The Minimalists TEDXWHITEFISH

Why it’s a must watch:

Joshua Fields Millburn and Ryan Nicodemus from The Minimalists give a talk all about being happy with fewer things in your life. I started my minimalist journey last year and believe me, it was the biggest mind-shifts one can make to lead a richer and fuller life.

My Favorite quotes:

1. Imagine life with more. More time, more meaningful relationships. More growth and contribution. A life of passion unencumbered by the trappings of the chaotic world around you. Well, what you’re imagining is an intentional life. It’s not a perfect life, it’s not even an easy life, but a simple one. What you’re imagining is a rich life. The kind of rich that has nothing to do with wealth.
2. Everyone around me said I was successful, but I was only ostensibly successful. You see I also had a bunch of things that were hard to see from the outside. Even though I earned a lot of money, I had heaps of debt. But chasing the American Dream, it cost me a lot more than money. My life was filled with stress, anxiety, and discontent. I was miserable. I may have looked successful, but I certainly didn’t feel successful.

Image credits: Top by Freestocks.org via Pexels

Other related:

Disclaimer: The information contained in our website, blog, guest blogs, e-mails, videos, programs, services and/or products is for educational and informational purposes only, and is made available to you as self-help tools for your own use.

- Advertisement -

How to Invest Your Money For Intermediate-Term Goals

By

Irene Makanga

-

April 18, 2019

0

How to invest your money for goals achieved within a 3 to 10-year investment horizon.

Medium term goals are normally big investments such as saving for a home down payment, wedding anniversary, saving to start a family and more. In order to reach these goals, you’ll need to set aside cash in small manageable amounts on a monthly basis in well-balanced investment vehicles.

A balance between risk and return – such that we are more conservative than long-term investment options yet more risk tolerant than short-term options. Yielding a better return will make it easier to achieve the goal, yet risk cannot be isolated as it might wipe out your gains. When it comes to intermediate-term investing there is no definitive answer. It really depends on the demands and personality of the investor.

Factors to Consider

To make a decision on where and how to invest for intermediate-term financial goals, here are some of the things you’ll need to consider:

Deadline. If you have a strict deadline, then consider taking a more conservative approach and avoid the stress of market fluctuations. If you don’t have a strict deadline than consider how much uncertainty you can handle.
Uncertainty. We are talking about an estimated time or general time frame to meet the goal. This means that the goal can be moved forward if the money isn’t enough. This gives you more room to take on a little more risk and achieve a better return. However, even if you can afford to take on a little more risk for a better return – do you really need it?
Need. Based on the amount of time you have until the projected date, the amount of money already saved, and the amount you regularly put away – what kind of return do you need to meet this goal. Sometimes, you may find that you don’t really need a return any better than a simple savings account.
Willingness. No matter how much risk you can take on, the question that will always remain is – are you willing to handle market swings? Putting your money in the stock market, for instance, means that you subject yourself to the additional stress of watching your investments go up and down.

Intermediate-Term Investment Options

The interception between risk and return yields the following investment options for medium-term investors:

1. Saving Accounts

Saving accounts are a basic and pretty boring way to save your money but not bad though. They offer convenience and the guarantee that your money will be there when you need it.

2. CD’s

Certificates of Deposit require you to keep your money invested for a specific time period, which may vary from one month, three months, six months to several years. In return, you get a better interest rate than saving in a regular saving account. Generally speaking, with CD’s, the longer you save the better return you get and thus, have penalties if you withdraw your money early.

3. Lending Club

Lending clubs are great for medium-term investors because they offer return maximization while minimizing risk. There are some great clubs out there that are offering about 12% or more, per year and are very well managed. Considering how the debt market is today, these clubs are a great place to make a good return.

4. Bonds

Investors can purchase specific bonds such as corporate or government bonds with maturity dates of 1 to 10 years. There is a bit higher risk with this option as there is no diversification, particularly for corporate bonds. To reduce this risk, invest in highly rated corporate bonds with good and stable returns.

5. Bond Index Funds

Bond index funds are offered by investment banks and are for investors who do not wish to invest directly in the bond market. There is still an element of risk with bond index funds but it is not as big. This is because the index fund spreads money across the entire bond market, which reduces the overall risk by diversification.

6. Balanced Mutual Fund

The balanced mutual fund is also offered by various investment banks in Kenya and invests in a mix of both stocks and bonds. It allows investors to spread their money across both investment options within a single fund. The aim is to find the right mix of investments in a good way to give you an upside potential while limiting the downward risk.

7. Stock Market Fund

The stock index fund invests in stocks only and offers the highest potential return on all investment options listed here. This fund allows investors to spread their risk over the entire market instead of pinning all hopes on single company stock. Funds attract a per cent management fee, which will reduce the overall potential return of the fund.

In a snapshot…

Investment Option	Quick Facts	Potential Market Return
Saving Account	Convenient Very low risk, low return	2% – 7%
Certificates of Deposit	Attract penalties on an early withdrawal	7% – 8%
Lending Club	Low liquidity Possibly low risk depending on management and high return	12% -20%
Bonds	May have a minimum investment Moderate risk	9% -13%*
Bond Index Funds	May have a minimum investment Have a management fee	8% – 12%
Balanced Mutual Fund	Have a management fee A mix of both bonds and stocks Relatively moderate risk and high return depending on the mix	12%
Stock Index Fund	Have a management fee High risk with high return	10% – 13%**

*Government bonds return year to date.

** NSE All-Share Index and NSE 25 Index rate of return year to date.

Strike a Balance Using Multiple Approaches

Given the above options at your fingertips, you’ll then need to bridge the gap and also strike a balance if you decide to use multiple approaches. To do so, you’ll need to determine how much you need to have in x amount of time and the best options to help you get there.

Let’s take a hypothetical scenario to see how this can play out. Assume you want to buy a house in about 5 years. You will need about KES 5m for a down payment, but you also know that you can afford to wait longer than the necessary 5 years.

Here is what you can do:

If you are flexible with when you want to buy the house, and you’re okay with watching your account balance fluctuate in the meantime, maybe you do something like the following:

Have half of your savings go into a savings account or CD.
Have the other half of your savings into a balanced mutual fund, which has 60% stocks and 40% bonds.

Overall, this means that you have 30% of your money in the stock market, giving you upside potential while exposing you to some risk of loss. But, it would also mean that you have half of your money protected from any kind of drop in value. Hence, enabling you to get some of the benefits of each approach.

Just to be clear, that isn’t meant to be a recommendation and it may not be right for your specific situation. It’s just an example of how you could strike a balance between multiple approaches.

To Summarize

Investing in medium-term goals is very tricky as one needs to balance between risk and return. At the end of the day, you get what you put it – low risk translates to low return and high risk translates to the high return. The best strategy would be one that offers the highest compound consistent return with no risk of losing it all. Thus, ensure that you regularly reevaluate your goals as they are bound to change over time and make the necessary changes to your investment strategy.

Great instances to evaluate is when:

a. There is a big market upswing or big influx of cash, which places you ahead of schedule – thus giving you the option to take a more conservative approach to your investment strategy; or

b. There is a market downswing, which places you way behind schedule – in which case you may want to increase your savings to get yourself back on track.

All in all, what really matters is that you are saving enough to reach your goal, given the investment vehicle you choose to help you get you there.

Other related:

Disclaimer: The information contained in our website, blog, guest blogs, e-mails, videos, programs, services and/or products is for educational and informational purposes only, and is made available to you as self-help tools for your own use.

- Advertisement -

NewsWeekPRO

NewsWeekPRO

Company

What Is A Bond?

The Different Types of Bonds & How They Work

Sovereign Bonds

Municipal Bonds

Corporate Bonds

Major Considerations of Bond Investing

Q. What Are the Main Risks of Investing In Bonds?

Credit Risk

Inflation Risk

Liquidity Risk

Reinvestment Risk

Q. How Much of Your Portfolio Should Be Invested In Bonds?

What is A Bond Fund?

Why Should You Invest In Bonds?

Key Things You Need to Know

Tally Up Your Resources

Determine Your Financial Obligations

Expenses

Debt

Other Considerations

How Much Life Insurance Should You Get?

Who Doesn’t Need Life Insurance?

Overall

#1 Uncertainty Fund

#2 Buy When Low, Sell When High

#3 Avoid the Market Noise

Make The Move, Stay the Course

Money Personality Types

#1 The Saver

#2 The Spender

#3 The Security Seeker

#4 The Risk Taker

#5 The Giver

#6 The Flyer

Do you spot yourself?

#1 – Failing to Plan

#2 – Taking On Debt to Finance Lifestyle

#3 – Forgoing Insurance

#4 – Failing to Save

#5 – Putting Off Saving For Retirement

#6 – Wasting Time

#7 – Avoiding Taking Risks

#8 – Not Building A Good Credit Score

#9 – Allowing Expenses & Debt to Balloon

#10 – Doing Life Without A Financial Plan

1 – Naming A Beneficiary

2 – Naming A Guardian

3 – Handling Death of A Beneficiary

4 – Including A Residual Clause

5 – Planning For The Unexpected

Simply Put

1 – CBA’s Loop

2 – Wally Next

3 – Good Budget

4 – Expense Manager

5 – Branch

Ultimately

1 – Switch Banks

2 – Pack Lunch

3 – Eat at Home

4 – Save the Planet

5 – Improve Credit Score

6 – DIY

7 – Plan Major Purchases

8 – Shop Online

9 – Unplug Appliances

10 – Reconsider Communication Needs

11 – Don’t Pay Interest on Credit Cards

12 – Haggle

13 – Exercise at home

14 – Ditch Insensible Friends

1 – Psychological tricks to help you save money by Wendy De La Rosa

2 – This is the side hustle revolution by Nicaila Matthews Okome

3 – An honest look at the personal finance crisis by Elizabeth White

4 – Financial Literacy: Mellody Hobson TEDMIDWEST

5 – A Rick Life With Less Stuff by The Minimalists TEDXWHITEFISH

Factors to Consider