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Investing while young
Investing while still young is absolutely the best time to achieve your life’s dreams and goals. It can mean the difference between an easy or difficult path your life might take.
An important factor in your favour during the younger part of your life is that you can afford to take more risks. This means that you can invest in riskier and (in most cases) higher yielding investments simply because you have the time to recoup your losses elsewhere if your investment goes wrong.
Of course, safer investments with lower risks and (most probably) lower returns have the time to build up into a substantial account. But if you have a higher risk tolerance, you can invest in the riskier vehicles that older investors don’t have time to take a shot at depending on your income.
Let us assume that Isaac Zidana is an employee of THONA Investments Ltd in Rumphi and earns K20,000 a month. Each month, Isaac spends K15,000 on groceries, utilities, food and all other household necessities. This leaves him with a balance of K5,000 at the end of each month.
Isaac then decides to invest the K5,000 balance into any one of the following investment avenues: bank savings accounts, stocks, bonds, mutual funds, education, and real estate.
To begin with, K5, 000 is too small for him to buy a house (unless he has some collateral somewhere to take mortgage from the building societies). He can decide to invest in further studies by correspondence but he may have to leave the money to accumulate first before embarking on any meaningful educational courses.
With the K5,000, he may not buy any stocks (shares) probably because the current minimum stocks the broker may allow to buy may have to be worth a lump sum of K250,000. With all the other options not feasible for Isaac, the most immediate and rewarding option for the left-over would be to open a bank deposit account.
Thus Isaac will go for either a traditional or fixed savings account. The next question is which bank will Isaac open his fixed deposit with? He will have to go round the banks or phone them on what interest rates they offer on savings or fixed accounts.
Once Isaac has found the bank with the highest fixed deposit interest rate, he will then have to go and ask the man in charge of the fixed deposit accounts on whether the interest he will be given will be ‘compound’ or ‘simple interest’. Compound interest is better than simple interest as it offers more interest over a period of time.
For example, let us suppose that Isaac opens a six months fixed deposit account with the K5, 000 at one of the commercial banks in Malawi where the fixed interest rate is 10% per annum.
Firstly, if we use simple interest, the amount of interest that the bank will give him at the end of the six months will be:
Simple Interest = (principal amount) x (interest rate) x (period of time the amount has to be repaid).
To find the amount that must be repaid, Isaac must first convert the 10 % annual interest rate into a monthly interest rate:
0.10 (or 10%) / 12months = .00833
So simple interest = K5, 000 x (.00833) x 6 = K249.90
So at the end of the six months period, Isaac will earn K249.90. The amount that the bank will give Isaac at the end of the six months will be the K5, 000 principal plus the K249.90 interest which translates to K5, 249.90 in total.
On the other hand, if we suppose that the bank uses compound interest (which is the most widely used in the world of finances), then Isaac’s compounded amount at the end of six months will calculated as follows:
Compounded amount = principle x (100%+ monthly interest—then multiply the answer six times which is the number of months).
Isaac’s compounded amount, therefore, will be K5,000 x (1 + 0.00833)6
The answer is K5,255.00
So at the end of six months, Isaac would earn K255.00 (K5,255 - K5,000) as interest. The amount the bank will give Isaac at the end of the six months will be the K5, 000 principal plus the K255.00 interest or a total of K5, 255.00.
The bigger the invested amount, the more you make out of this compound interest. A savings bank account like this fixed one, may be a good starting point for investment for the youthful Isaac.
Isaac may decide to keep on rolling the compounded amount into more fixed deposit with the bank and it can eventually roll into a huge amount after some period. Such a huge amount, once realised, can be used into the other investment vehicles which he failed to access at first.
Feedback: tbmunthali@yahoo.co.uk
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