Thinking of investing your hard-earned money?

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My daughters have been breathing down my neck to start blogging about business related subjects. As a Financial Consultant, I regularly conduct presentations on Estate planning, Financial Security and Investments which is why they are hounding me to post topics related to what I do. I have finally decided to do one on the topic on financial investment. However, I will do it in a series of posts in order to keep it short and interesting and also to find out if this will be useful and appreciated by the community in general and their Steemit group in particular. We begin with:

Step 1 - State your goals or objectives for investing.

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On a piece of paper I would like you all to write down your goals or purpose for investing. This must be broken down into 3 categories;

a. Short Term (12 months or less)
b. Medium Term (1 year to 3 years)
c. Long Term (3 years and longer)
Remember, any investment plan must have a purpose. An objective. A goal that will help you focus on what you want to achieve without being sidetracked or distracted by any sudden urges to spend limited investible funds on something that was unplanned. After you have written down your goals, attach a value or amount to each item. Example: If you wrote under Medium Term "A new car within two years from now", state how much you are budgetting for this car. If you wrote under Long Term "Educational Fund for my son 16 years from now", how much funds would you want to have for this.

Step 2 - Determine the amount of money you should not invest.

Again in the same piece of paper write down how much you want to set aside for the items listed below. These are called non-investible funds that need to be covered first before any kind of investment is done.

a. Emergency Fund
b. Monthly Living Expenses
c. Insurance and health premiums
d. Outstanding credit card balance

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Emergency Fund should be at least 3 to 6 times your monthly salary or earnings. The logic behind this is if you suddenly lost your job it might take at least that length of time finding another one. The Emergency Fund will be what you will live on while out job hunting and will ensure that your standard of living isn't adversely affected. Example: If you make 25K monthly, your Emergency Fund should be at least 75K (25K x 3) upto 150K (25K x 6). So if you do not have this amount yet, you have to work hard to accumulate this and place it in a Savings Fund which can be accessible anytime, anywhere should the need arise.

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Monthly Living Expenses are what you spend every month for your subsistence such as food, rent, utilities, transportation, etc. Consider this as your monthly fixed cost. Of course, part of what you may think as fixed costs are actually variable costs which you can do away with should the need arise. Example is Friday night gimmick, drinks and videoke with friends. Or the daily frappe you buy from Starbucks. Or the weekly dine out at Alfredo's. If you are serious in investing for your goals, you have to trim the fat, so to speak.

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I consider Insurance and health premiums a must spend for items. A minimum amount of 2k a month can give you a coverage of P1M already in case of untimely demise or a HMO card in the event of the need to have you hospitalized. Sudden deaths or medical emergencies can severly wipe out all your hard earned investments if these are not provided for.

Credit Cards.

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This is the bane of the modern world. Credit Cards make spending so easy. So easy that sometimes (or oftentimes as the case usually is) we tend to overspend and regret it much later when we find we cannot pay the full bill and have to pay in installment. The usual charge for installment payment is somewhere from 3 to 3.5% a month. This is enough to erase any gains you may have realized in your investments especially in a declining market. Believe me.

The figures you place opposite each of these items are the funds you cannot invest. These will have to be covered first before you can you start investing.

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Step 3 - Calculate the amount you can invest.

Now that you know what you cannot invest, let's work on finding out how much you can.
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Normally, the difference between your monthly earnings and the items in Step 2 above are called net savings and are considered investible funds. If you are earning P25k a month and your monthly living expenses (food, rent, clothing, utilities, transportation, etc) is P15k and the premiums for insurance and health care is 5K you have a net savings of 5k (25 - 15 - 5). This P5K is the amount you can invest assuming you already have your Emergency Fund safely deposited in a Savings Account or Fund and that you have paid in full your credit card balances. If not, this 5K should first be used to pay off the credit card and raise the Emergency Fund. Only then can we ask the next question. "Is this 5K per month enough to bring you to your goals?" ( Some of you may have a bigger amount than 5K. If you have a net savings of 20K per month, then ask yourself the same question. Is it enough for you to achieve your dreams?)

Investing 5K a month may not be enough to achieve all your goals. But, it can be enough to meet one or two. Let's take the example of Educational Fund of P1 Million 16 years from now. If you divide 1M by 16 years this will give you a figure of 62,500 which is the amount you have to save every year for 16 years to get P1M. This is roughly about P5,200 monthly which will fit snugly with your 5K investible funds per month. At least for the moment, being able to achieve one goal is better than none. Right? So remember the next Step below.

Step 4 - What you want to invest vs. what you can invest.

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Want and can are clearly two different matters. As in the example above, the investible fund is only 5K per month. However, you may have multiple goals which you would like to begin saving for but the sources of funds are just not enough. So what should you do in this case? If earnings are not yet enough you have to scale down on your goals and set less loftier aspirations. You can defer the less important goals and go for what matters most to you in the list. If "travel abroad next year" is what your heart desires more than anything else, and you have limited investible funds, then go for it and put aside the rest. At least temporarily. When you find that your earnings increase, like getting more rewards in Steemit, then slowly revive those that you have deferred and include them in your investment outlays.

Don't borrow money to put into investment. It may work in a rising or bull market but can backfire once the market reverses and you may wind up paying more in interest and sooner or later eventually erode your capital.

Step 5 - Where to invest your money.

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This will be the last step I will discuss in this post. The next one or Part II will be dealing with in-depth analysis of the performances of different investment alternatives. Meanwhile, the question you may want to ask at this point is, "Where is the best place to invest my money? Before I can answer this, I will need to know your risk profile. Are you a risk taker? When I ask you, "If the value of your investment drops by 50%, will you still be able to sleep at night?" and you answer me, "It's okay." clearly you are a risk taker. There are some who cannot take even a 10% loss in their investments making them highly risk averse. Only you will know at what point on the risk profile line you belong (From Highly Risk Tolerant down to Highly Risk Averse). Source

The Financial Pyramid is the most common method in explaining the relationship of risk profile and investment decision. The most stable area in the pyramid is the base. And as you go higher the pyramid, the less stable the position becomes. The same with investing. For those who want stability and security of investments, they tend to choose Savings Tools which include Savings Account, Money Market Placements, Time Deposits, Checking Account and Fixed Income Securities. This investment class carries little or no risk at all that the principal amount invested can be lost. They also offer the highest liquidity. However, they also offer the lowest returns among all of the investment classes. So if you are totally averse to risk, this is the place to park your investible funds albeit the low interest.

Going higher the financial pyramid can offer a higher potential return on investment. But, the risk increases as well. If you are moderately risk averse you may want to try investing in Mutual Funds or Unit Investment Trust Funds, Corporate and Government Bonds which offer much higher interest rates compared to Savings class. The risk however is moderately higher too. Corporate and Government bonds guarantee a coupon rate (interest) over a period of time which assures the investors of an income stream over the life of the bonds. However, the prices of these bonds go up and down depending on interest rates. The risk that bond prices go down at the time you need to redeem your investment is ever present. For those aggressive types who want higher returns can look into investing in the Stock Market. The volatility of stock price swings is more prevalent in this class of investment. However, historical returns have been always positive. At the tip of the pyramid are the speculative investments which have the highest risk among all the investment types. Futures, derivatives and now, cryptocurrency all belong to this class. Even if you have a high risk tolerance it is suggested that the amount you invest on these should be limited to less than 10% of your total holdings. Remember, your investment portfolio should not be entirely on a single class or type. Diversification is the name of the game. Diversification will ensure that investors are insulated by wild swings and fluctuations in the market.

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In my next post I will discuss the rates of returns of these different investment classes so investors like you can make sound decisions on where and how much to invest among these investment types.

Hope this helps in your financial planning and investment plans in the future.