The concept of investment and decisions around it is perhaps the most discussed issue in financial management circles with sometimes very complicated explanations. The quote by Warren Buffett, however, explains investments in entirety for me. “Someone’s sitting in the shade today because someone planted a tree a long time ago.”
Two critical things stand out in this quote: time and seed. Investments need time! As referenced in the quote, “a long time ago”. If you’re taking an investment decision, whether it’s a short/ medium/long term, you need time. Again, a key component of investments is the seed. You can’t start without anything; you need something and so the tree in there is what suggests the seed. It doesn’t matter the size of the seed.
Everyone must start with a seed even though the size of the seed may differ. You might start with GHS20 and someone may start with a million but it is still a seed. The quote also mentions generations after you will benefit from an investment you make today, so think of your investment decision today as a part of your purpose and influence.
It is important for everyone to consider investing for the purposes of financial security. However, before taking the decision on what, where, why and how long you should invest, there are some fundamental things one needs to consider.
The first is to know yourself. Duplicating another person’s investment goals is like sewing a dress with someone else’s measurement, it just won’t fit. You need to ask yourself relevant questions to know what works and fits your context. Questions like: what is my monthly income? what extra income do I earn? where can I reduce my expenses; are a few you could start with.
There are some expenses you cannot do away with; these may include electricity and water bills, whereas there are some monthly expenditures you can do away with. There are also some variable expenses that you may want to reduce so that you can invest the excesses. Ask yourself these pertinent questions: What are my liabilities: what loans and assets do I have? Do I have a landed property somewhere?
Do I have Stocks? Do I like buying on impulse or do I go by a budget? After an assessment of yourself you can then appreciate where to take money from to put aside for an investment. Having the money is the first step. Now that you have the money what next?
After getting the money, you need to set objectives for your investment. What is the bigger picture for you? One way to look at the bigger picture is how you want your retirement to look like. Do you want to live in your own home for example?
Go on vacations? Have your own business? What are your plans and goals? Having answers to these questions will enable you set SMART- (Specific, Measurable, Attainable, Relevant, Time bound) – financial/investment goals. Being specific allows you to get more clarity on what you have to do and the steps you have to take.
Having a measurable goal means putting a figure to the goal, e.g. GHS500,000 in fixed income securities. Setting a goal that challenges you is great however make sure that it is attainable. If you own a bicycle now, you are more likely to own a Mercedes Benz in a few years to come, than it is to own a private jet; but by all means, dream big.
Ask yourself if the goal is relevant to your context. Set a time period to realize your goals otherwise you may never start. For example, I want to own a house in a gated estate by age 50 or I want to build my short-term investments to GHS100,000 in the next 5 years.
There should be a time set for all the objectives that you have. That is what brings in the focus. Knowing why you are investing also gives you the oomph and helps you keep your eye on the ball.
In all of this, what remains critical is that no matter what you have, start now and remain consistent. It does not matter how much you have but it does matter that you start now because of the compounding effect and time value of money. It’s said the best time to plant a tree was 20 years ago and the second-best time is now.