Last month, we discussed the importance of attaining financial security by creating wealth for ourselves through investments. An investment as we know, is basically taking a risk on your savings to make your money work for you. Such risks could be investing in
halaal stocks, starting your own company, going into a joint venture or buying property.
We also reviewed several investment concepts such as understanding the meaning of assets and liabilities, differentiating between savings and investments, and grasping the concept of real returns.
We shall now take a look at a few habits we need to develop to become seasoned investors.
SELF DISCIPLINE
To transform wealth creation from an aspiration to a reality, it is important to be disciplined when planning your finances and never spend all that you earn. You should reserve something for the future.
People usually intend to start investing when they have "more money". However, they never start because they simply spend more as their earnings increase.
Deciding to save should not be a function of how much you earn, but about understanding the fact that you need to plan your life and act accordingly. After all, there have been quite a number of people who inherited wealth and unfortunately have nothing to show for it today, while some people were born poor but have become very wealthy due to their strive for financial independence.
You need to control your money by controlling yourself ... spending sensibly.
SAVE 10% OF EARNINGS
Wealth creation cannot be achieved without savings. Many people wait for a windfall to become rich, but in reality, wealth needs to be built. A little of what you earn should be preserved for yourself. This may seem obvious but let us examine it. At the end of every month when we get our salaries and we make so many payments (electricity, rent, foodstuffs, loan repayments) and hardly consider investing a fraction of it.
But what you need to do is to see yourself as an expense and pay yourself first before attending to other bills. The habit that needs to be adopted is to save at least I0% of our earnings monthly. Keeping something aside may initially seem like a difficult feat, but after a while you would get used to it and may even increase the amounts invested over time.
CONTROLLING YOUR EXPENSES
It is important to be conscious of regular expenses to weed out unnecessary costs. This is because an accumulation of "insignificant" expenses can ruin a person without him even knowing it.
Imagine any regular treat you give yourself, it could be as simple as buying a doughnut every weekday after lunch. Assuming this costs you N 100 each time, this means you spend N500 a week, which translates to N24, OOO a year! It is very unlikely that you planned to spend so much on just doughnuts, but you were probably not even aware of this expense due to the insignificance of "N100". You most likely would rather have invested the sum of N24,000 instead.
We therefore need to control our expenses by restraining ourselves, so that we can increase our level of investments. This means that we can create our wealth now and treat ourselves later.
START NOW
Time plays a significant role when we are investing. This is because of the principle of compounded growth. To compound means to increase and the earlier you start investing, the more returns you stand to gain.
Let us use an example in conventional finance to explain how small sums can become large amounts of money. Assume you have a child who was given N 10,000 on her naming ceremony. If you decide to invest it for 18 years at a rate of return of 15%, she would receive N 123,000 on her 18th birthday. But what if you decide to invest the amount when the child is 5 years old? It means she would receive just N61, 500 on her 18th birthday, simply because you waited for 5 years before investing. This is also how small loans become huge debts if they are not repaid on time.
We should therefore not leave for later what we can do today, because every moment wasted means losing another opportunity to make our money work for us.
INVESTMENTS
Having understood the basic concepts and taken the decision to adopt the right habits, we are finally set to start investing. It is important to seek professional advice to ensure that your investment is protected. The basic advice the professionals should have for you include:
CREATING ASSET BASKETS
Create asset baskets for yourself (that is asset allocation). This means that you classify your assets into various categories such as savings (for security and access for quick cash and emergencies); investments such as stocks real estate or entrepreneurship (for real returns and growth).
DIVERSIFYING YOUR RISK
Never put all your eggs in one basket. Generally, investments should be diversified no matter how much money is being made from a particular one. This insures you against risks.
CONCLUSION
The importance of financial security cannot be over emphasized for the following reasons:
- It ensures independence which is attractive and a good form of Dawah
- I t promotes the payment of Zakat to the Muslim treasury to aid the poor
- It encourages the creation of endowments for the Ummah for sustaining our mosques, schools, hospitals, etc
- It supports economic growth, which subsequently eliminates the ills of poverty.
Now that we are more enlightened about why we should invest and how, the challenge is for us to take a step today towards making it a reality and also ensuring that it is in line with our values.
This article was culled from the publications of Deen Communication Limited