Don’t reward yourself too quickly. It is better you invest the money than lose the money
When people start building wealth and they make a little money, sometimes, they become so pleased that they start to reward themselves with cloths, jewellery, cars, trips, etc. This type of attitude will quickly destroy the cycle of wealth creation. It is similar to someone who is trying desperately to lose weight and then after losing only 5kg, goes and eats all the junk food in the world. Such a person would simply have undone the little progress made and probably created more problems for instead.
The trick to increasing your wealth is not to reward yourself too quickly and undoing what you have done. A much better reward is to stay the course and achieve more. True financial independence is within your reach. All that is required most times is for you to be smart by investing in appreciating assets and learning how to compound your money at a rate close to 100 per cent. You must also learn never to touch your seed capital until you have turned it into a money spinner that will be your personal fortune.
Invest instead of keeping cash in the bank
With rising inflation, which today stands at nearly 14 per cent, stocking your money or retirement savings in a savings account in a bank means you are losing money.
It is better you invest the money than lose the money. Beyond your emergency fund, it is never advisable to put your money in a bank account because it will not be able to keep up with the rate of inflation. Money kept in the bank never appreciates but continues to lose value when compared to the rate of inflation. What this simply means is that if you kept a
N100,000.00 in a savings account in 2015 when inflation was about 7 per cent, your money would have lost half of its value now that inflation has risen to about 14 per cent.
Let us illustrate this further: In January 2015, a bag of rice cost between N9,000 and N11,000. Due to inflation, it now costs between N18,000 and N19,000. Compare placing your N9,000 in a savings account at a rate of 3 per cent and buying a bag of rice with the same N9,000 for sale in today’s market at N18,000. Which of the two options will offer higher returns for your money?
Stock market option
In order for your money to stay ahead of inflation, you will be better off investing in the stock market because it has a better potential to give you higher returns. If you have money, you will not need to wait a long time. Just consider speaking with a stockbroker who will be able to advise you on the appropriate stocks you can invest in. It is also a good idea to invest your money in a high quality asset or quality business at moments of high pessimism and hold it for the long term. You need to bear in mind that these are long term averages. The market may go down in one year and you have to wait another couple of years for things to turn around. This is why it is better to invest money that you can put away for several years.
Albert Einstein reportedly described compound interest as “the most powerful force in the universe.” Compounding basically helps you grow your investments, plan for the future and grow your wealth. Compound interest is the interest that is generated by your principal plus its interest. This is how it works: Imagine that you put N1m into your investment account at an interest a rate of 10 per cent per year. At the end of
Year 1, you have N1.1m You start Year 2 with N1.1m in your investment account which is the N1m from the principal, and N100,000 from the interest earned. You keep the full N1.1m, i.e. both the principal and the interest, invested in Year 2. By the end of Year 2, your investment would have grown by another N101,000 which will give you a total of N1.201m. Note that in Year 1, you earned N100,000 in interest. That is because the only money you had was the principal, but in Year 2, you earned N101,000 in interest because you had the principal plus the first year’s interest. The extra N101,000 represents interest that compounded on top of your interest.
Going further, you then start Year 3 with N1.201m in your investment account to earn another N120,100 which now gives you a total of N1.321m by end of Year 3. You will notice how your 10 per cent pay-out has grown. You received N100,000 in Year 1, N101,000 in Year 2 and N120,100 in Year 3. This is because interest is compounding on the previous interest. At the end of the Year 4, you would have earned almost half of the original investment. You can imagine if you stared early in life.
By Evangeline Anumba