Updated: Mar 29, 2021
I know most of us have gone “where do I start with my investment journey?”
The follow-up thoughts usually sound like this: 🤔
Do I even have enough money?
Where do I start?
What will make me the most money?
How long before I start making money?
I understand your concerns, as I had the same questions several years ago, and I didn’t know where to start. However, I did fragmented research, and I will suggest a process that you can also use to achieve your financial goals:
01 Financial plan (The Blueprint) 📋
A financial plan is a layout of the money goals you have and a route of how you’ll get there. We have goals in most areas of our lives. However, we often lack financial goals, which is ironic considering most goals need money to be accomplished.
I like using the analogy of building a house to describe building your investments. A financial plan is a blueprint that you use to guide you in building your investments. The blueprint helps you have realistic expectations regarding the returns you want to make and the period that best suits your needs.
Some examples of goals that young people consider includes:
Being independent of parents while at school
Saving towards a car or an asset
Saving towards travel
Settling costs relating to Post-School relocation
You should ensure that the goals you choose can be quantified and have time attached to them.
02 Money Tools ( Financial planning tools) 🧰
These tools will form part of your foundation- I continue to use the same analogy of building a house.
a) Statement of Financial Position
Those of you who studied accounting are familiar with them, but statements of financial position shouldn’t be confined to classroom walls. They apply to everyday life. Before you start to invest, you need to know where your finances are sitting to determine how much effort you will require to achieve your goal. This is what is referred to as a person’s net worth.
Most of us are familiar with the term net worth, as celebrities and popular business moguls usually have their net worth estimated by various online sites. I’m sure you’ve heard Jeff Bezos’ net worth mentioned before. To determine your net worth, you will take all of your assets and subtract your liabilities.
💡 An Asset: “An asset is a resource with economic value that an individual, corporation, or country owns or controls with the expectation that it will provide a future benefit.”
💡 A Liability:” A liability is something a person or company owes, usually a sum of money. Liabilities are settled over time through the transfer of economic benefits including money, goods, or services.”
Your net worth might be negative, positive or even zero! Don’t be intimidated if you don't have many assets for now since the goal of investments is to grow your assets.
Your net worth will be Total Assets - Total Liabilities = kes 5,000. Lucky you to be starting on a positive note. Your Net worth is not static. It constantly fluctuates as your Assets and Liabilities Change.
As I’m sure you’ve already figured from the net worth calculations above, to grow your net worth, you need to increase your assets and keep your liabilities as low as you can.
Assets can be increased by saving or investing. Savings and investments need to be funded from a source. Sources can be an inheritance- which we all wish we had, income such as salary or business, or passive income such as interest, rentals, dividends etc.
You need to understand your current income and expenses to determine how much you can save every month. This is where budgeting comes in. A budget is simply summarising how much income you get and what you plan to spend it on.
A Budget can look like this:
The most important part of a budget is not making one but reviewing and tracking the budget to see if your actual expenses look like the estimated expenses- try it; you’ll be surprised.
There are various free spend trackers and budgeting apps online which you can use to assist you.
c. Paying yourself first
Most of us are familiar with the following problem: you get paid, and like a responsible adult, you pay expenses such as your rent, utilities, groceries, transportation costs, and maybe treat yourself to something nice. Then, if you have money leftover, you save it. The problem is there’s never money leftover!
Parkinson's second law can be used to explain why that happens. It states that "Expenditures or "money paid" out rises to meet income."This means that if you have Kes 1,000 to spend, you’ll most likely spend it all, and if you have Kes 10,000, the same will happen. You might think there will come a time when you earn enough money. However, in practice, that time will never come because your desires will grow as your income grows.
One way to combat that is with the pay yourself first principle. Paying yourself first is when you put aside your savings and investment money before you pay any of your expenses, yes, even rent! This forces you to live off the remainder of your income, which essentially means you’ll cut down on your current expenses. To some people, this doesn’t sound appealing, so you have the option of making additional income instead of trimming expenses. The best way to determine how much to put aside is to use a budget as described above.
💡Pro tip: Automate your investments and savings once you have decided what the ideal amount to save is. a=Automating can be done by setting up a debit order from your current account to an investment or savings account.
There are, of course, recommendations on how your ideal budget should look(Refer to the summary below). However, if your budget doesn’t look like that, don’t get discouraged as budgets vary from person to person based on income, dependants and how many responsibilities a person has.
A generic expenses model looks as follows:
General expenses 55%
Emergency Fund 5%
Luxury Items 10%
Leisure Activities 5%
Investment and Savings 25%.
A budget is a continual document that will change as often as your life changes. Focus on getting the principle correct, as opposed to being fixated on a specific amount. The amount which you set aside to pay yourself first should evolve as your income grows.
Now that we have those foundational principles let’s focus on adding a structure to our investment journey.
Click here to find out how to build the walls around the investment house we are building as an analogy.
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Disclaimer: The views expressed in this publication are those of the writers where particulars are not warranted. This publication is meant for general information only and is not a warranty, representation, advice or solicitation of any nature. Readers are advised in all circumstances to seek the advice of a registered investment advisor. Full Disclaimer