By Godfrey Kenneth Gobba
The concept of using a financial asset as an investment solution usually makes more sense to high income earners than to low and middle income earners.
For ordinary people that are struggling to make a living, financial assets tend to make more sense only if they can comfortably be used as savings alternatives.
So if you are a low or a middle income earner, here is how you can use financial assets like Stocks, Treasury Bills and Government Bonds to save your money.
Short Term Savings
The rule of thumb here is that if whatever you are saving for is utmost 12 months away you can comfortably use Treasury bills as your primary savings vehicle.
So are you saving up for an air ticket that you will need in the next 12 months? Or is it a wedding in the next six months?
Perhaps it is your rent that you pay once every three months or it could be your suppliers that you intend to pay within the next 45 days.
If you need it in less than 12 months, you can save up for it using risk free Treasury bills.
By saving using Treasury bills, not only will you enjoy returns usually between 9% to 13% per annum, but you will also say good bye to monthly maintenance fees and monthly taxes on your hard earned savings.
This should be able to get you that car or air ticket several times faster than if you had used your traditional 2% per annum savings account.
Long Term Savings
The rule of thumb here is that if whatever you are saving for is at least two years away you can comfortably use Government bonds as your primary savings vehicle.
So are you saving up to buy land or build a house in three years’ time? Are you accumulating capital to start up your own business in two years’ time? Or is it an agricultural project that you want to start in the next 5 years?
If you need it in the next two or more years, you can save up for it using low risk Government bonds.
By saving using Government Bonds, you will enjoy returns usually between 13% to 18% per annum and this should also get you that land faster than a traditional savings account.
The rule of thumb here is that if whatever you are saving for is at least 10 years away you can comfortably use Stocks as your primary savings vehicle.
So are you putting away some money for your long term financial security? Are you saving for a retirement that is still more than 10 years away? Or are you simply putting away some money for your children’s financial future or education?
If you need it in the next 10 or more years, you can save up for it using high risk Stocks / Shares.
A precautionary rule of thumb here is that when you are left with about two years to reach your target date, you should sell a large portion of those shares and move the money into safer government bonds.
This will lock in your stock market gains and ensure that your savings are available to you when you finally need them to be.
A Final Word
Whether you call them investment solutions or savings alternatives, it doesn’t really matter. The only thing that matters is what these financial assets can do for you.
Now is the time to make a difference in your financial life by embracing these financial assets.
So what are you waiting for?
The author is CEO, African Investor Academy