What’s in it for me?

Mary has saved Sh100,000. This money could be school fees for her daughter, needed in the next three months, or it could be money she can invest. It has been in her current account.

She was having a discussion with her friend Njuguna over tea in the morning. Njuguna has dabbled successfully in the real estate market. There are now some subdivided plots of land that a particular sacco is selling in a prime, developing area. According to Njuguna, these plots will be selling for double that price in six months.

At lunchtime, Mary passes through a stock broking firm that she has previously used to buy shares. The broker shows her some research the firm has done on a particular stock and advises her that this is good time to acquire some of those shares.

According to their research, the share is undervalued and he is therefore certain the price will go up. Back at the office, she picks up the newspaper. There is a two-year treasury bond on offer giving a decent return. The results of the three-month treasury bill are also there.

She leaves work that day tired and more confused than ever. She’s even tempted to go buy a pair of shoes to ease her pain because that is a clear-cut decision. She knows exactly what shoe she wants and where to buy it.

The information overload that Mary is suffering happens to a lot of people. The problem is not that she does not have the money or knowledge, it is that there are too many choices. She doesn’t know whether to turn left or right. Many people who face this problem end up paralysed because the thought of analysing the possible choices just overwhelms them. Others may do the wrong thing because they believe the strongest salesman.

There is one major decision that Mary has to make before any of the choices in front of her will make sense: She has to decide what she ultimately wants the money to do for her. It cannot be a choice between school fees or investment. It has to be one or the other. If her aim is to pay school fees next term, that has to be more important to her than any other investment and even more than the possibility of doubling money quickly.

Let’s say she puts that money in shares; it could increase in value in three months – or it could also halve. The risk that she may not have school fees is more detrimental to her than the possibility that she can increase her funds. Her objective here requires that she keeps money safe and that it is accessible in the short term i.e. three months.

VIABLE OPTIONS

Treasury bonds are safe, but she would need to lock her money in for two years, so that’s not an option. She can keep her money in the bank or in the three-month treasury bills.

These guarantee that the Sh100, 000 she puts in does not go below Sh100, 000, and she can get her money out in time. Even if she did not know about any investment, she can do her research with those requirements in mind.

Say she decided she could raise the school fees through other sources of income, e.g. a regular salary, and pursue investments; she would still need to define that objective better. The objective that she defines will help her understand how much time she is willing to give the money and therefore what she can invest in.

For example she can decide that the objective is to accumulate funds towards retirement. It can also be school fees, but rather than immediate fees it may be something like college funds. Both these purposes are long-term and require the funds to grow.

For retirement, you really want the Sh100,000 you invest to become Sh500,000 in 10 years. So the treasury bond option will not work right now. Treasury bonds will keep your money safe and give you a regular income but your Sh100,000 investment will be worth Sh100,000.

It is the shares and property that will grow your funds.

Even if she decided these are the type of investments to pursue, it does not have to be the specific ones that someone tried to sell her today. She can do some research and even get advice from others. At the end of the day, she has to choose investments because of strong fundamental reasons and not because someone (many times who has a vested interest in selling the investment) stated the value will increase.

Treasury bonds become an appealing choice after retirement because then, income will be Mary’s first priority instead of asset growth. She will need everyday money (cash) for bread and milk. A plot of land is not currency the supermarkets understand.

You can move money from one investment to another based on what your goal or objective is at the time. What you need the money to do drives the kind of investment vehicle you choose.

The investments available are not the ones that should not drive your agenda. Once you know what you are trying to achieve you will not get very overwhelmed, as you are now able to narrow your options. Learn to ask yourself as you invest: What’s in it for me?

Waceke runs a programme on personal financial management. Find her at [email protected] twitter @centonomy.