Reader Tunde writes:
I am a 22-year-old graduate from a polytechnic in Nigeria with a diploma in business administration and management.
I’m from a poor background but have had dreams of a great future since I was a young boy.
So, to help make those dreams come true, I want to invest. My job at a cocoa store pays me 300 naira per day, and, for the past few months, I’ve saved 100 naira every day. I have now accumulated 12,000 naira in total.
I live with my mum and brothers and sisters and don’t have any debt. I would like to invest my savings for the next 6-8 years until I have enough to capital to start my own food-processing business.
Can you help me invest in the stock market? I would welcome any tips you may have.
Tunde from Nigeria
You are an all-star saver. It’s not easy to put aside money every day, especially as a recent graduate, yet you’re saving 33% of your income. That’s a fantastic rate!
You’ve also managed to stay free of debt, which will be a huge help to meeting your goals.
So, let’s consider your next financial moves.
When African stock markets are performing like they have over the past year, the temptation is to jump into the market head-first. After all, you don’t want to miss out on the great returns, right?
But never forget that stocks are risky investments – especially over the short-term. Just because the market has gained 33% this year doesn’t mean it will do the same next year. The Nigerian Stock Exchange lost almost 70% of its value in less than a year back in 2008. No one can promise with 100% certainty that it won’t do the same again next year.
Therefore, in order to save a lot of tears and frustration, here are three things to do before you contact a stockbroker and invest your hard-earned cash.
1) Open a savings account
You’ve built up a nice, little wad of cash over the past few months. Now you need a safe place to keep it.
If you haven’t done so already, deposit this money in a savings account at a local bank. That way, it will be readily available if you need it, but it won’t be sitting in your pocket or under your mattress where it will be tempting to spend on inessential stuff.
Open the account at a bank with a branch located conveniently near your home. You don’t want to waste an entire afternoon traveling across town just to do your banking.
If there are a number of banks nearby, shop around for a savings account. Base your decision on a combination of the following three things:
- Interest rates – The higher the better. You want every kobo you own to be working as hard as it can for you.
- Fees – The lower the better. Some banks may charge fees to open a savings account, to maintain it, or per transaction. Ideally, you will find a bank that doesn’t charge anything.
- Accessibility – Most banks offer term accounts that offer higher interest rates in exchange for a commitment not to withdraw the money for a certain length of time. These accounts can have their place, but at this point, you need an account that will allow you to withdraw money at any time without penalty.
Here’s some more information about savings accounts at a variety of Nigerian banks:
2) Build an emergency fund
Now that you have a safe place for your money, it’s time to build an emergency fund.
Make a list of all your monthly expenses. Write down the amount you spend on the essentials — everything that keeps you and your family clothed, housed, and fed throughout a given month. This might include things like rent, food, transportation, electricity, and mobile fees.
Add up the monthly cost of all of these necessities and then multiply that number by six. Write this number down and post it in a place where you will see it every day. This is the amount of money that you should save in case you lose your income. That way, if you lose your job at the cocoa store or fall sick or experience some other misfortune, you will have six months worth of savings to live on while you recover.
3) Save for major purchases you must make within the next five years
After you’ve saved up a comfy emergency fund, it’s time to gaze into the future.
Take a few minutes to list any big purchases that you must make in the next five years. Will you need to go back to school? Buy a vehicle? Get married?
If you answer “yes” to any of these questions, then you should continue to save enough money to cover the cost. Why? Because the stock market is not in the business of guarantees. It can make you wealthy, but it can also leave you with less than you started with. You don’t want a stock market downturn to get in the way of your short-term goals
Learn while you save
The time that it will take for you to complete the steps above is an ideal amount of time to learn the basics of investing in shares. The Story of Boniface is one place to start.
Happy saving, Tunde! And please don’t hesitate to follow up with any questions on the above.
Have I forgotten anything? What advice would you give a young person who’s considering investing in shares for the first time?