Investing in Bonds

February 25, 2020 by Paul Owolabi Leave a Comment

Introduction

In this series of articles, we have already explored different investment options like small businesses, stocks, and mutual funds. In this article, we look at bonds as another popular, tried, and tested investment vehicle.

What is a Bond?

A bond is a financial instrument that companies, municipals, and the federal government use to raise capital for different purposes. With bond investment, an investor lends money to the bond issuer in exchange for interest. When an investor purchases a bond from a bond issue, the later pays interest to the investor and at the maturity date, the face value of the investment.

For example, Company A can issue a 5-year bond at a 5% interest rate. Investor A can purchase $20,000 worth of this bond. In that case, the company pays an annual interest (often paid twice a year) of $1,000. In the fifth year, Company A will also pay $1000 interest and make repayment of the principal amount – $20,000.

How to make money from Bonds

There are two ways to make money from a bond: interest payment and growth in bond value.

When a bond investor decides to hold the bond until maturity, he earns a consistent interest (as long as the issue does not default). Alternatively, the bond investor can decide to sell the bond before maturity. You can make money from this if there has been an increase in the bond value from the time of purchase to the time of sale.

However, a bond is majorly an income investing strategy. It is an investment option suitable for people who want to earn a consistent stream of income for a particular period. Therefore, most bond investors tend to hold it until maturity.

Different Types of Bonds

There are various ways to classify bonds. However, for our purpose, we will classify bonds based on the issuer. There are four types of bonds:

Corporate Bonds: These are bonds issued by companies to raise funds for various R&D and capital investment projects. The interests earned on corporate bonds are subject to taxation.
Municipal Bonds: These are bonds issued by states, local governments, cities, or local communities for public infrastructures and services. Interests on municipal bonds are exempt from tax at the federal level. If the investor purchases the municipal bond from his home state, it will also be exempt from state and local taxes.
Treasury Bonds: These are bonds issued by the federal government. Treasury bonds come with the lowest risk since they are backed by the financial power of the federal government. Interests from treasury bonds are exempt from state and local taxes.
Savings Bonds: Savings bonds offer a fixed rate of interest over a fixed period. Savings Bonds are non-marketable (you cannot sell them), and the interests accrue (only payable at maturity or redemption). The federal government issues them, and interests earned on them are exempt from state and local taxes.

There are other types of bonds popular in any discussion about bond investing:

Zero-coupon bonds: These bonds do not pay interest. Instead, they are issued at below the par value. They function more like a treasury bill where the investor receives the par value at maturity.
Junk Bonds: They are bonds issued by high-risk companies with ratings below BBB- (on standard and poor or Fitch) or Baa3 (on Moody). These bonds offer a high yield on investment to compensate for the high risk.

Pros of Investing in Bonds

Investing in Bonds is desirable for many good reasons:

Predictable and consistent income stream

A bond is a good investment vehicle for income investors. A bond allows you to earn a predictable and steady income stream through the bi-annual payment of interest.

Community Involvement

By purchasing bonds from municipals, especially in your home state, you contribute to the development of your community and state. While this is non-financial, it gives a sense of social fulfillment.

Lower risk

Bonds are typically less risky compared to shares. Corporate bonds are the riskiest of bonds. However, rating agencies provide ratings of corporate bonds to help you identify companies that are financially sound with a lower risk of default.

Tax-exemption

When you purchase municipal bonds, you are exempt from federal tax on the interest. Similarly, when you purchase treasury and savings bonds, you are exempt from state and local taxes on the interest.

Cons of Investing in Bonds

However, there are some downsides to investing in bonds:

Interest Rate fluctuation

Interest rates do fluctuate. When they do, it may be a disadvantage to bond investing. If you purchase a bond today at 5% interest and interest rate rises to 6%, you will feel a sense of loss when companies issue new bonds at 6%.

While selling your bond and purchasing the new one is an option, it depends on the market value of the bond you want to sell. Since bond value sustains an inverse relationship to interest rate, you would probably lose if you sell the bond.

Long maturity period

Holding your money in bonds for 10, 15, 20 years is a long-term commitment. Tying down your money for that long period. Unlike stocks where you can buy and sell after a short time, selling a bond before maturity is mostly a bad idea.

Lower returns

The returns on bonds are generally smaller than the returns on stocks. Corporate bonds have the highest returns and the highest risk (compared to other bonds). However, the lesser risk (compared to stocks) compensates for the lower returns (compared to shares).

Possibility of default

While bonds are low risk compared to stocks, they are not zero risk investments (treasury bonds are the closest to no-risk investment). There is always the possibility that a company or municipal will default on interest payments.

Factors to consider before investing in Bonds?

There are certain factors that an investor must consider before deciding to invest in bonds:

How close are you to retirement? When you are far away from retirement, you should have a higher percentage of your investment in stocks and a lower percentage in bonds. However, when you are closer to retirement, it is a great idea to be more invested in bonds than when you are farther away.
What is your risk appetite? Bonds offer predictable and consistent income, which is attractive to the risk-averse investor and income investors. If you are an income investor or a risk-averse investor, you will want to invest in bonds.
Diversification: Bonds are an excellent way to diversify your portfolio. This is especially important if your portfolio is stacked with so many stocks. It is a good way to reduce overall portfolio risk.

Recommendations for Investing in Bonds

Below are some recommendations for investors who decide to invest in bonds

Have a plan: Like every other investment vehicle, have a plan for your investment in bonds. What do you want to achieve with bond investment? How does this goal(s) fit into your overall financial goals?
Conduct Research: Use the rating agencies to know companies with a low-risk profile. Also, research the company issuing the bond to assure yourself of their viability.
Avoid speculation about interest rates: Devise a strategy and stick to it. Timing the bond market is often futile.
Create a bond ladder: To deal with the problem of the long maturity period, you can create what is known as a bond ladder. It involves purchasing bonds with different maturity period – 5 years, 10 years, 15 years, etc. rather than just buying a single type.

Conclusion

A sound investment portfolio will include a certain portion of bonds. The size of the portfolio that constitutes bond investment will differ from person to person and from time to time. However, whatever the size, bonds are tried and tested investment vehicle that surely belongs in your investment strategy. Make good use of them.

Investing in Mutual Funds

February 18, 2020 by Paul Owolabi Leave a Comment

What are Mutual Funds?

Investing in mutual funds is another investment vehicle that can help you grow your money and achieve your financial goals.

Mutual Funds are pools of money collected from various individual investors and invested in multiple securities like stocks, bonds, fixed-income securities, among others. Mutual Funds are alternatives to investors picking their stocks. In this system, rather than owning a bunch of stocks, an investor purchase a portion of a mutual fund, which consequently invests all the pooled resources in various classes of securities.

The managers of mutual funds (fund managers) are professionals who have experience and expertise in finance and can make sound investment decisions. A mutual fund seeks to achieve diversification by investing in different types of securities.

An individual investor purchases a portion of the mutual fund at the Net Asset Value (NAV) per share. The NAVPS is the value of the mutual fund on a per-share basis at every point in time. The value of the mutual fund is adjusted at the end of every trading day to reflect the results of that trading day. An investor earns money from mutual funds through dividend/interest (as the case may be), or through capital gains in the securities, the fund is holding on to or through an appreciation in the NAV of the fund (which allows the individual investor to sell his or her stake in the fund for a profit).

There are open-ended and close-ended mutual funds. With open-ended mutual funds, you can purchase and redeem units of the mutual funds throughout the year. However, with close-ended mutual funds, purchase only takes place during an initial offer date and redemption at specific maturity date.

Types of Mutual Funds

There are different ways to classify mutual funds. However, for the sake of simplicity, we will focus on six types of mutual funds:

Equity Funds

Equity Funds are mutual funds that invest in shares of listed companies. They can invest in growth stocks, value stocks, or dividend stocks, or a combination of the three. Equity Funds are very good for people who look for high returns, though the risks with equity funds are also high.

Fixed Income Funds

Fixed Income Funds are mutual funds that invest in fixed income securities with a fixed rate of return, majorly in the form of interest. Fixed-income mutual funds have lower risks and lower potential returns when compared to equity funds.

Money Market Funds

Money Market Funds are mutual funds that invest in short term fixed income securities such as treasury bills, government bonds, certificates of deposit, and commercial papers. They are safe investments that earn moderate and immediate returns.

Balanced Funds

Balanced Funds are mutual funds that seek to bridge the high returns and high risk of equity funds and the lower returns and lower risk of fixed income funds. Balanced Funds invest in a proportion of stocks and balance it with a portion of fixed income securities to reduce the risk. The ratio between stocks and fixed income securities vary among mutual funds.

Specialty Funds

These mutual funds focus on a specific industry. There are mutual funds that focus on the energy industry, the telecommunications industry, the real estate industry, etc. These funds concentrate their investments on stocks in this particular industry.

Index Funds

Index Funds are mutual funds that track the performance of a particular index. These mutual funds seek to match the performance of a specific index (e.g., S&P 500). Index funds tend to have lower management fees.

Exchange-Traded Funds

These are investment funds traded on the stock exchange market. The share prices fluctuate throughout the day as the exchange-traded funds are bought and sold. ETFs have lower expense ratios and management fees.

Pros of Investing in Mutual Funds

There are many advantages of investing in mutual funds, especially when compared to stock investing or bond investing.

Professional Management

The first and obvious advantage is that with mutual funds, you have the benefit of professional management. Fund managers are professionals who have the knowledge, experience, and competence to research securities and make sound decisions (in most cases).

Diversification

An average investor will not have the funds to achieve a level of diversification that maximizes returns and minimizes risk. However, when these funds are pooled together, it provides better opportunities for diversification, which in turn, helps individual investors maximize their returns.

More Flexibility

With mutual funds, the options and varieties and endless. You can choose from different types of mutual funds following your financial goals and risk appetite.

More Liquidity

Investing in open-ended mutual funds allow you to redeem your portion in the mutual funds whenever you want. Mutual Funds, therefore, provide you with liquidity, enabling you to cash out when you want.

Lesser Efforts

Picking your stocks involves a lot of research and effort. With mutual funds, you can save yourself time and effort.

Lesser Fees

Purchasing mutual funds saves you from the fees you will pay on every stock purchase. To create a diversified portfolio, you will need to buy different shares, and the fees can add up quickly.

Cons of Investing in Mutual Funds

However, investing in mutual funds also have its disadvantages:

Loss of Control

You are no longer in control of the stocks you purchase. The fund manager makes those decisions on your behalf. It does not matter if you think you have some unusual insights that can bring in huge profits. You do not have any control over “your portfolio.”

Poor Performance

Though mutual funds managers are experts, they are not immune to poor decisions and performance.

Management Fees and Operating Expenses

Mutual Funds charge management fees and incur operating expenses, which reduces the returns you get on your purchase of the mutual funds.

Too much liquidity

Since open-ended mutual funds need to be liquid in the case of redemption, they have to leave a specific part of their assets in cash to meet with redemption demands. This can lead to lots of tied-down cash and reduces the possibility of profits.

Difficulty of evaluation

Due to the inability of data, evaluating mutual funds can be a difficult thing to do. It is hard to know what constitutes the portfolio of mutual funds. Important financial ratios available for individual stocks are not available for mutual funds. The unavailability of data also makes it difficult to compare the performances of one mutual fund with another.

Recommendations for Investing in Mutual Funds

Mutual Funds are still one of the reputable investment vehicles that every investor should consider. Here are some few recommendations if you decide to invest in mutual funds:

Keep your financial goals before you: What you want to achieve with your investments will determine what type of funds you should buy. If you are still very young, investing a greater portion in equity funds or in balanced funds who have higher equity proportions can be a great idea. However, if you are closer to retirement, you will need a greater portion in fixed income securities or balanced funds with higher fixed income portion
Shop Around: While there are not many available data to compare mutual funds, there are still some relevant information that can point in the right direction. Compare management fees and operating expenses. If possible, get reviews and recommendations from other investors. The reviews and recommendations are the best way to understand the performances of a mutual fund.
Define your risk tolerance: We all have different risk tolerance levels. Define your risk tolerance level and stay with the types of mutual funds you are comfortable with.
Consider tax consequences: Purchasing index funds, exchange-traded funds, and the other typical mutual funds come with different tax consequences. You need to consider how your investment in mutual funds affect your taxes and make a decision in line with that.

You can find other recommendations here

Conclusion

Investing your money is a crucial decision that you cannot be entirely passive about. However, a little bit of passivity can be helpful, especially with mutual funds. Investing in mutual funds requires some decision making. It is one of the areas you need to recognize the “personal” in personal finance in addition to adhering to general guidelines.

Stock Investing

February 11, 2020 by Paul Owolabi Leave a Comment

Stocks are one of the most popular investment vehicles that people have consistently used to build wealth. A report shows that nearly every member of the Forbes 400 list got there because of a large portion of shares in public and private corporations.

If you have decided to take investing seriously, one of the investment vehicles, you have to consider is stock investing. In this article, we look at the different types of stocks and how you can get started with stock investing.

Types of Stocks: Structure

A stock is a portion of ownership in a company. When you purchase a share (shares) in a particular company, you own a specific portion of the company. The portion of the company you own depends on the number of shares you buy and the total number of issued shares.

There are two broad ways that companies structure their stocks:

Preferred Stock

Preferred stock, as the name implies, gives you a preference over common stock owners. When you own preferred stock, you are entitled to dividend payment before common stock owners. Also, in the case of dissolution, preferred stock owners have a prior claim to the assets of the company before the common stock owners (after debentures and other interest-paying debts)

However, preferred stock owners do not have voting rights in the company. Consequently, they do not have a say in the management of the company.

Preferred stocks are not as popular as common stocks. They are a blend of common stock and bond and provide lesser returns and lower risk in comparison to common stocks.

Common Stock

Common stocks are the most popular. In ordinary language, when someone refers to stock, he or she means common stock. With common stocks, you have voting rights, which gives you a say in the management of the company. However, common stock owners have the last claim on the assets of a business in the event of dissolution, and they receive dividends after the preferred stock owners. Common stocks are riskier in comparison to preferred stocks but with a higher possibility of returns.

When you decide to invest in stocks, the first decision is if you want preferred stock or common stock. With preferred stock, you get lower risk and lower possibility of returns, and with common stock, you get higher risk and higher possibility of profits, among other things (as discussed above)

Types of Stocks: Returns

Another way to differentiate stocks is how you earn returns from them. You earn returns from stock in two ways: dividend and capital appreciation. A dividend is a payment out of the net income of the company that they make to their shareholders. Companies usually pay a dividend every quarter. The company declares a dividend in absolute amount, which is then structured on a per-share basis (dividend per share). Consequently, the amount (gross) you get is the DPS * number of shares you hold.

The other way to earn returns from a share is through capital appreciation. CA occurs when the market price of a stock grows over the years. If you bought a share of Apple for $113 in August of 2015, you have gained about $200 on every stock of Apple as of today. If you decide to sell, you have earned over $200 (gross) on every share.

In terms of returns, there are two types of stocks:

Dividend Stocks

Dividend stocks are stocks of companies that decide to pay a regular dividend to their shareholders. There are two options that a company has when they earn income (net). They can either pay a dividend or reinvest that money in the business. Reinvesting the money increases the equity of the company, which leads to an increase in market price going forward.

With dividend stocks, the company prefers to pay dividends rather than pursue aggressive reinvestment.

Growth Stocks

Growth stocks are stocks of companies that prefer to reinvest their earnings into the business and grow the market price of shares rather than pay a consistent dividend.

There is no right and wrong choice here for the investor. A dividend stock can be a good investment if you need a reliable source of consistent income for one reason or the other. Dividend stocks also protect you from the endless “external factors driven” fluctuations of the stock market. However, with dividend stocks, there is often a cap on your earning power. Growth Stocks, on the other hand, can be a sound investment if you need a huge nest egg at a later time. With growth stocks, there is no cap on your earning potentials. However, growth stocks expose you to continuous fluctuations in the stock market.

Types of Stock Investing: Goals

We can also differentiate stocks based on the goal of the investor. There are also two types of investors here (broadly speaking):

Value Investing

Value investors are those who invest for the long term. These are the Warren Buffet type of investors who purchase stock for the long term (5 years and more). Value investors tend to focus less on the daily fluctuations in the market, instead, focusing their attention on the company’s fundamentals (earning, debt, equity, product, market, etc.)

Value investors can invest in growth stocks as well as dividend stocks. However, the former will form a big part of their portfolio.

Profit Investing

Profit investors are those who invest in stocks for short to medium term. They can be day traders, swing traders, scalpers, among others. The goal of profit investors is to make a profit from the fluctuations in the prices of stocks. Profit investors can invest in dividend or growth stocks depending on their strategies.

Most of those who have built wealth from stock investing are value investors who have a long-term focus. It is, therefore, advisable that the more substantial part of your strategy focuses on value investing.

Two Key Steps in Stock Investing

Once you have decided on your preference (common or preferred stock, growth or dividend stocks, value investing, or profit investing), the next step is to decide on the particular shares you want to buy and when to buy them.

To accomplish this, you need to carry out some analysis. There are two types of analysis in stock investing – fundamental analysis and technical analysis.

Fundamental Analysis

Fundamental analysis involves the evaluation of the fundamentals of a company. When you carry out fundamental analysis, you are looking at:

Does the company have a competitive advantage or not?
In what industry does the company operate, and what are the future trends of the industry?
In what way will future technology affect the product of this company? Does it have a future going forward?
Who are the managers of this company? Are they responsible and trustworthy decision-makers?
Does the company have the potentials for a sustained increase in earnings power?

Answering these questions has qualitative and quantitative aspects. On the quantitative side, you are looking at the company’s historical financials and considering some metrics like:

Earnings Per Share
Price to earnings ratio
Price to book value ratio
Return on equity
Growth in book value
Growth in Earnings
Debt to equity ratio
Current ratio, etc.

There are many metrics in addition to the ones above. Majorly, what you are looking for is the ability of the business to stay in business, declare consistent earnings, improve return on equity, grow its book value (if you want a growth stock), and expand its operations without too much debt (if you want a growth stock)

Another related thing is deciding when to enter the market. If you decide that a stock has good fundamentals, there is still a need to enter the market at the right time. Value investors enter the market when the stock is underpriced, i.e., when the intrinsic value of the stock exceeds the market price. Entering the market at this point guarantees higher returns going forward. Value investors also prefer to buy stock in a bear market or when the economy is down, and prices are much lower than the intrinsic value.

For a comprehensive guide on fundamental analysis, get this book or this course.

Technical Analysis

While value investors spend much time doing fundamental analysis, technical analysis is the work of the profit investors (broadly speaking).

Technical analysis is a process where you use the historical variations in the price of a stock to predict future variations. The purpose of technical analysis is to enter the market and exit the market at points where you can earn a quick profit on a stock.

Profit Investors have different strategies they use that helps to determine their entry and exit points. Whatever the strategy, the goal is to buy when prices are low and sell when prices are high. There is not so much focus on the fundamentals of the company. The primary focus here is the strategy of the profit investor and the ability to make profits than losses.

Value investors can also use TA, but it is to determine the best time to buy stock rather than continuous monitoring of prices. Alternatively, value investors just hold the cash and wait for the bear market or any of the other economic conditions that result in low prices. Another option is to use dollar-cost averaging rather than waiting endlessly for those conditions to hit.

For comprehensive guides on technical analysis, subscribe to this Youtube Channel. (Since I am an advocate of Value Investing, I am not a big fan of TA, and I don’t really recommend profit investing. But if you want to do it, this channel has the best materials)

Purchasing Stocks

To purchase the stocks of your choice, you will need to open an account with a broker. There are many brokers, and you need to shop around.

Some of the things you need to consider when choosing a broker include:

Fees: This is an issue for profit investors. Since they buy and sell repeatedly, the fees they pay, eat into their profits. It is, therefore, essential to shop around for quality brokers with cheaper fees.
Online Platform: A broker should have an online platform where you can purchase and sell shares.
Information availability: While a stockbroker is not your financial advisor, they should provide you with some quality information that could help your decision-making. Whether it is a blog, industry report, national economy report, investment research, etc. there must be something of value in addition to buying and selling shares on your behalf.
Quality of service: You will want to be sure of the quality of the service of the broker. Read reviews and ask for recommendations.

Tracking Stocks

After purchasing stocks, you have to track the performance of the shares. For value investors, this means keeping an eye on the company to stay abreast of fundamental changes like change in management, technological development, investment decisions, etc. The value investor wants to be sure that the fundamentals are still solid.

The Profit investor wants to keep an eye on the price movements of the stock to know when it gets to the expected price where he or she wants to take the profit.

Selling Stocks

Value investors sell stocks when they no longer trust the fundamentals of the company. Perhaps an untrustworthy man joins the board or debt is scaling up in proportion to equity and assets, or the company is not keeping up with industrial dynamics that may hinder its future growth. In such cases, a value investor may sell and invest in another company.

The profit investor sells when the stock has gotten to his or her projected price. He then buys again and sell and continues the process. For a profit investor, the fundamentals are not as relevant as the price movements (though in many cases, without a strong fundamental, there are no predictable price movements).

Some Recommendations

Here are some recommendations when it comes to stock investing:

Be a Value Investor
Combine a mix of growth stocks and dividend stocks depending on your investment goals
Fundamental Analysis is critical. Do not buy shares because you have an emotional attachment to a company.
Diversify your investments across the different sectors and industries in the economy
Have concrete goals and plans. If you listen to other people’s advice, do so with your goals and plan right before your face. What is suitable for A is not ideal for B.
Learn to identify opportunities rather than following the trend
Commit to making data-backed decisions rather than emotionally charged decisions
Use dollar-cost averaging to build up your positions in a stock gradually
Don’t be afraid to sell your position in a company when there are good reasons to do so
Monitor your stocks but do not over-monitor. It will save you from unnecessary panic

Conclusion

Stock Investing is one of the tried and tested ways to build wealth. Like every other thing, knowledge is at the foundation. Grow your knowledgebase on stock investing and ensure you make decisions that are in keeping with your investment goals and overall personal goals.

Investing in Small Businesses

February 4, 2020 by Paul Owolabi Leave a Comment

Introduction

The first investment option we will look at is investing in small businesses. The drive for entrepreneurship is leading to the creation of many new companies every now and then. It is on record that about 12,000 new companies are registered in China every day. The global interest in entrepreneurship provides opportunities for investors to invest in startups and earn considerable returns. As said before, investing in small businesses comes with massive potential for returns, though the risks are also significant. It is, therefore, essential to understand the different ways you can invest in small businesses and how to do it right.

investing in small businesses comes with massive potential for returns, though the risks are also significant. It is, therefore, essential to understand the different ways you can invest in small businesses and how to do it right. Click To Tweet

How to Invest in Small Businesses

Defining a small business is not very simple. Nevertheless, in this article, we take a small business as a startup that does not have access (at least at the beginning) to large investment sources like FDI (foreign direct investment) or venture capital. These businesses start by pooling capital from some individual investors rather than institutional investors.

A small business can start as a limited partnership, a limited liability company, or some variations in between.

Investment Options

You can invest in small businesses in three ways:

Start a small business: If you have a sound business idea and a good business plan, you may decide to use some of your savings to start a small business. Starting a small business does not necessarily mean managing its daily operations. You can choose to do so or see the business through its early stages and appoint a manager.
Buy a small business: Alternatively, you can decide to purchase a small business that is up for sale or table an offer to buy a company you might be interested in purchasing.
Invest in another person’s small business: This is the easiest route (in terms of your involvement) to take. You can choose to invest your money in a viable small business and earn returns on your investment.

Investment Structure

If you take the third route, you will need to subscribe to either of two investment structures:

Equity: With equity, in exchange for your investment in the business, you will get a portion of the ownership of the company. You will get returns according to the share of profit or the rate of return whenever the company makes a profit. For example, if five investors paid $100,000 each, the share of profit (ceteris paribus) will be 1/5 or 20%.
Consequently, for every profit declared, you can expect 20% of the returns. With equity investment, you keep partaking of the returns of the company. However, should in case the company folds up, you also bear the loss.
Debt: The alternative route is to lend money to the founders of the small business and get your money back with interest over a stated period. With debt, you are sure of getting back your money even if the company fails.

Equity provides you with better prospects for returns in the long term but with significant risk. In contrast, debt provides you with only a return on your initial investment with no risk (as long as it is secured on the company’s assets). Making a choice is never easy. Imagine how frustrated you will be if you borrowed Amazon money (for example) at the start rather than purchasing equity. On the flip side, imagine the frustration if you invested in the equity of a business that failed three years from inception.

Pros of Investing in Small Businesses

There are some good reasons why you should invest in small businesses. Some of them include:

Potential for huge returns: A small business can turn into a large corporate organization in the future with enormous potentials for returns. Whether you start it, buy it or invest in it, the earning opportunities are massive if things go right.
Opportunity to be part of something big: By investing in a small business, you may just be investing in the next P&G, Facebook, Amazon, PwC, among others. It is undoubtedly a delightful prospect.
Tax Benefits: When you start a business, you can take more deductions and write off expenses in the ordinary course of business. Such deductions and write-offs reduce your tax bill.
Retirement benefits: When you start a business, you can enroll for retirement contributions with higher limits compared to when you are an employee (a SEP-IRA allows up to 20%)
Investing in your passion: Apart from the financial advantages, starting a small business or even investing in one can be an opportunity to be part of something you are passionate about.

A small business can turn into a large corporate organization in the future with enormous potentials for returns. Whether you start it, buy it or invest in it, the earning opportunities are massive if things go right Click To Tweet

Cons of Investing in Small Businesses

Despite the opportunities, investing in small businesses also come with some disadvantages:

A greater level of risk: While many new companies spring up now and then, about half of them fail in the first five years. As a result, there is a higher level of risk when you invest in small businesses (especially if it is an equity investment). The company can fail, and you can lose your money.
Lack of control (when you invest in another person’s business}
Lack of steady income at the beginning (when you start the small business)

Recommendation for Investing in Small Businesses

What are some steps you can take to maximize the pros and minimize the cons for each of the investment options?

Starting the business

Study and understand the market you are exploring
Start a business in a niche you are passionate and knowledgeable about
Create a viable business plan
Be realistic about your expectations
Have a plan B to deal with the uncertainties of a new business
It’s best to start the business while you are still employed
Get a strong team that shares your passion
Seek professional help when necessary. Don’t be a lone ranger
Get all the essential legal and tax-related paperwork in place
Always do excellent business

Buying the business

Be specific about what you are looking for. Don’t make fundamental compromises
Understand all the liabilities of the existing company, especially taxes
Better to start a new business and acquire the assets of the existing business than buying the stock of the business
Get a lawyer and understand all the legal situations
Find a way to walk through differences in culture
Be firm in your negotiations
Ensure the seller is willing to stick around for a while
Ensure the key employees are willing to stick around for a while
Get an indemnity from the seller in case of future lawsuits based on things the seller did before selling to you

Investing in the business

Be specific about the type of business you want to invest in. Do not make fundamental compromises.
Request a business plan
Evaluate the risk factors and the different circumstances that can induce success or failure
Understand the market and viability of the business
Do due diligence on the business and the niche
Be firm in the negotiations.
Based on your risk management evaluation, choose between equity investment and debt investment.
Ensure the founder(s) have something to lose. Don’t be the only person taking up the risk
Ensure every agreement is in writing and well documented

Conclusion

Investing in a small business comes with potentials for high returns accompanied by great risks. Understanding the types of investments available and the pros and cons will help you navigate through the waters. When you decide to invest in small businesses, ensure you follow tested and trusted tips and recommendations to maximize returns, and minimize risk.

Where to Invest: A Summary of Some Good Investment Options

January 28, 2020 by Paul Owolabi Leave a Comment

Having understood why you need to invest your money and where to get money for investment, we must take a cursory look at the different investment options you should consider.

After you have gone through the discipline of saving money for investments, you need to understand how and where to invest the money so you can achieve your financial goals. This is essential because many so-called investment platforms are nothing but gambling or Ponzi. Losing your hard-earned money in unregulated, speculative “investments” can be very painful, especially given the discipline it took to save the money for investments.

One of the mindsets you have to do away with when it comes to investments is the get rich quick swindle. The kind of investments that multiply your money steadily over the years is what you should fix your gaze on. While advance in technology is opening up new investment platforms, it is better to stay with the old and trusted options and evaluate the new ones with informed skepticism.

So, without further ado, let us take a brief look at the trusted investment options that will help you grow your money and achieve your financial goals.

Small businesses

Investing in small businesses is one of the tried and trusted investment options. Generally, starting a business comes with a higher risk than the other investment options. However, if done well, it also comes with higher returns. When starting small businesses, it is essential to start a business in a niche you are familiar with and where you possess the knowledge and skills to achieve success. Of course, success is never a guarantee when it comes to starting a business; however, proper preparation is never absent from any successful business.

Here are 50 small business ideas from Small Business Trends.

Real Estate

Buying and selling real estate properties is another tried and trusted investment option. Generally, properties increase in value, especially in locations where demand is rising. When you buy a real estate property, you can wait for the price to rise and sell for a profit or rent out the property to collect monthly rent. The real estate business is primarily about getting good properties (with expected future rise in price) at lower prices. If you are up for the research process that comes with real estate, it is a good investment platform to consider. Robert Kiyosaki is a household name in the real estate business.

Stocks

Buying stock gives you part ownership of a company. When you purchase shares in a company, you are invested in the activities and financial results of the company. You profit from buying shares by either selling them for a higher price or earning dividends for as long as the company declares a dividend. There are dividend stocks who prefer to pay a part of their net income as dividend while there are growth stocks where the company reinvest earnings and prefer to grow their equity. To invest in shares, you need to have a penchant for analyzing the reports and financials of companies to identify those with a durable competitive advantage (potentials for growth and profit-making into the future)

Mutual Funds

A mutual fund attempts to take away the hard work of conducting investment research and making investment decisions from individual investors. A mutual fund aggregates funds from different individual and institutional investors to invest in various investment options like stocks, treasury bills, bonds, etc. Investment managers who have the expertise and experience to conduct research and make good decisions manage mutual funds. There are different types of mutual funds we will be considering later on in this series.

Bonds

A bond is a fixed instrument that represents a loan from an investor to either a company (corporate bonds) or government (treasury bonds). With bonds, you earn interest on your investment (quarterly or bi-annually) and get back the principal amount and interest in the last year of the bond. Bonds are for a fixed period (5-year bond, 15-year bond, etc.), but you can decide to sell at the secondary market. There is an inverse correlation between bond prices and interest rates.

Treasury Bills

Treasury bills are government securities issued by the department of treasury to finance the government’s budget. Treasury bills are short-term securities with a maturity of one year or less. With T-bills, you pay a discount on the T-bills (which constitutes the interest element) and get the full value of the bill at maturity.

Certificate of Deposit

Banks issue certificates of Deposit with specific maturity dates. They are time deposits that pay a higher interest rate compared to a savings account. You earn interest on the CD and get the principal amount back at maturity.

Agro-funds

Agri-funds are investment platforms where you can invest money in a farm for a defined period. The money earns a particular rate of interest for that period, which is payable with the principal amount at maturity. Most agro-funds are insured, giving you a level of confidence in the security of your investments.

Apart from these tried and trusted options, cryptocurrencies, forex, options, and futures are some popular investment platforms. However, I do not personally recommend these platforms. If, after investing in retirement, emergency funds, and these other tried and tested options, you still have some funds to spare, you may consider these other ones. If you want to go this route, ensure you acquire adequate education, and you tread with caution.

Conclusion

What we have done here is just a scratching of the surface. In the following articles, we will take a look at these investment options – the pros and cons, the different dynamics, what you need to do to achieve success, and how to structure your portfolio for maximum returns.

Stay tuned

How to Get Money for Investments

January 21, 2020 by Paul Owolabi Leave a Comment

Having looked at the reasons why investing your money should be a priority, it is essential to take some time to understand how you get the money for investments. Investment presupposes saving and saving presuppose that your expenses are lower than your income. The question then is, how do you get to that point where you have excess cash to invest? The question is essential because no matter how much knowledge you have regarding investments, you will not make much progress if your expenses are always outstripping your income.

no matter how much knowledge you have regarding investments, you will not make much progress if your expenses are always outstripping your income. Click To Tweet

Here are three ways to help you save more money for investments.

Managing your expenses

There are two broad ways to ensure you increase your savings. You can do this by increasing your income and keep your expenses static or keeping your expenses below your income. There is a sense in which you are not so much in control of the former (generally speaking). You have better control of the former – keeping your expenses below your income.

When your expenses are below your income, you are in a better position to save money and invest in profitable investments. How do you achieve this?

When your expenses are below your income, you are in a better position to save money and invest in profitable investments. Click To Tweet

Draw up a budget

Every progress in personal finance and money management begins with the art of budgeting. A budget is a document that outlines your expected income and expected expenses for a particular financial period. Depending on your source of income, a budget can be weekly, monthly, quarterly, or yearly. In some cases, it can even be appropriate to have it all.

Every progress in personal finance and money management begins with the art of budgeting. Click To Tweet

When you draw up a budget, it helps you to identify all the places where your money is going. You have a clear picture of every expense category and item, helping you to understand how you spend the money you earn. Without a comprehensive budget that delineates your income and expenses, it is hard to make much progress.

If you do not have a budget, it is time to start preparing one. Here is a comprehensive step-by-step guide that helps you develop a realistic budget.

Pay attention to your expenses

When you identify all your expenses, it is time to do some trimming. Most of us spend more than we need. Also, we spend more than we actually need to spend on the items we need. Take time to go through your expense items to identify those expenses that are overboard in terms of their importance and the money you spend on them. Identify the things you can do without and those you can acquire for lower prices with no dip in value. When you learn the art of shopping around, you will discover how to get items for lower prices with value for money.

Most of us spend more than we need. Also, we spend more than we actually need to spend on the items we need. Take time to go through your expense items to identify those expenses that are overboard in terms of their importance and the… Click To Tweet

Trimming down your expenses does not mean living a miserable life; instead, it asks us to rethink our definition of comfort, and how much we for them.

In this article, you will learn practical ways to cut down your expenses without living an “uncomfortable” life.

Trimming down your expenses does not mean living a miserable life; instead, it asks us to rethink our definition of comfort, and how much we for them Click To Tweet

The goal here is to make your expenses below your income and maximize your savings, so you can get more money to invest.

Commit to your budget

It is easier to set a budget; it is more difficult to follow it. The primary cause of such difficulty is lack of discipline. Discipline is not easy, and it is particularly hard for those of us living in the “instant everything” world. However, this is where you must keep the previous article in mind. Unless you have thoroughly understood the importance of investments, it will be hard to exercise discipline when the time comes to live out your budget. It is the sense that what you are disciplining yourself towards is worth the efforts that will help you take the demanding ride. This is where you want to fill your thoughts and imaginations with the reward of early retirement, financial independence, money working for you rather the other way around, multiplying your money, etc.

Unless you have thoroughly understood the importance of investments, it will be hard to exercise discipline when the time comes to live out your budget. It is the sense that what you are disciplining yourself towards is worth the… Click To Tweet

Another difficulty when it comes to staying true to a budget comes from the nature of some people’s income. This applies to businesspersons and freelancers who may not make a fixed amount every financial period. There are two possible scenarios here: one is where you make less than your budgeted income but more than your expenses and where you make less than your budgeted expenses. In the former situation, what changes is your saving (unless you are willing to reduce your expenses to maintain a consistent saving). In the latter case, it won’t be very easy to save. You may need to lower your expenses or tap into your emergency funds and replenish it when you exceed your budgeted income.

The goal here is to ensure you commit to your budget so you can maintain a consistent saving.

Increasing your income

Generally, increasing your income is not as easy as reducing your expenses. Nevertheless, it is still an achievable feat. Here are some options to consider:

Improving your skills for a pay rise

The decision to increase your pay is not in your hands. However, depending on the job, you can precipitate that decision by investing in your career. You can take some certificate courses, acquire some new skills, gain expertise in new areas of interest in your industry, and put yourself above the curve. When you do these, it becomes much easier (depending on your job) to get a pay rise or a better paying job in another organization.

Expanding your business for higher income

For business owners, it means expanding your business for more profitability. You can do this by entering new markets, exploring new products, or targeting new audiences. Look for opportunities to get more value for your business and increase your earnings potential.

Passive Income

There are many ways to earn some income on the side without investing much time and effort. Freelancing, online tutoring, blogging, affiliate marketing are some common ways to earn passive income. Here is a list of thirty passive income ideas you can explore.

Reinvesting your returns

A third way to get more money for investments is to reinvest your returns from current investments. For example, if you own a stock that pays a dividend, rather than spending the dividend, you can reinvest it in more shares. If you own a real estate property that pays rent every month, instead of spending the rent, you can put in mutual funds. The idea is to multiply your money further, increase your wealth, and achieve your financial goals faster.

Conclusion

Every talk on investment must begin with getting the money to invest. As a result, you need to spend time budgeting, trimming down your expenses, staying faithful to your budget, exploring means to increase your income, and reinvesting your returns. With these, you will have money set aside for investments. In this way, you will be ready to think through various investment options and make smart decisions.

Why Do I Need to Invest My Money?

January 14, 2020 by Paul Owolabi Leave a Comment

Irrespective of the current value of their assets, everyone wants more money. As we grow, our needs grow with us, and so do our expectations from life. The more the expectations, the more the goals we have to achieve, and the higher the money we require to achieve those goals and live the life we desire.

There are two basic ways to make money and acquire wealth. One is to get a job and work for money. In that way, our income increases as our experience and skill level increase. The increase in income comes through a better paying job or series of raise in a particular job. The rise in income meets the increase in expectations. The limitation with this way of acquiring wealth is you have to keep working all your life to meet your needs and accomplish your goals. An alternative method is to save a part of the money you earn and invest them in assets that will keep compounding in value into the future. In this way, while you are working for money, money is also working for you. Moreso, a time will come when you no longer work for money, and money is doing all the work.

The latter option is what we refer to as investing.

Saving vs. Investing

Saving is part of your disposable income that you did not spend (disposable income – expenses). If you earn $40,000 every month and you spend only $30,000, then $10,000 is your saving. Investment occurs when you put that difference between your disposable income and your expenses in an interest-yielding, moneymaking asset like a stock, bond, mutual funds, real estate, business venture, etc.

It takes a certain kind of attitude, commitment, and personal finance skills to save money and not consume it all on expenses. However, it also takes a certain kind of attitude, commitment, and personal finance skills to put the money to work. It is easier to lock your savings in a bank’s savings account where it yields paltry interest because you do not want to pursue the knowledge or take the risk of investing your money in assets that grow them.

Why Invest?

Why should you bother saving and investing your money? What are the reasons why saving is not enough, and you need to put your money into assets that will yield interest and multiply your money? Below are some of the reasons you should consider investing:

Grow Your Money

Investing is the best way to grow your wealth. When you save your money under the pillow, it remains what it is (in nominal value). However, when you put your money in assets that yield interest, the value of your money increases over time. If you invest $100,000 in an asset that grows by 10% annually (compounding interest) for five years, you will have $161,051. In essence, you have made $61,051 in five years, without exerting any effort. If you allow it compound for ten years, you will have $259,374, meaning you have earned $159,374 without doing anything. The average worker in the United States who works a 40-hour week earns $46,800 in a year.

When you invest your money, you allow your money to grow even while you are sleeping.

Retirement

Investing your money will help you achieve your retirement goals. Even if you want to work all your life, you will get to a point when you cannot. Moreover, most people do not want to. When you retire, you have to keep up with your spending patterns without doing any work. To do that, you will need to have a nest egg that is big enough for all the years you will spend in retirement.

Saving money under the pillow or in a savings account will never yield the nest egg you need during retirement. It is by investing in high interest-yielding assets that you can grow your money to the point where you can retire with confidence.

Financial Independence

When you retire, you always attained financial independence. However, it is a great objective to achieve financial independence earlier. Someone might not retire but still achieve financial independence. Financial independence is a condition where you no longer need to work to maintain your spending habits (budget). You may decide to work, but you don’t need to do it. You can choose to leave the job at any time. Financial independence is desirable because it frees you to do the things you love doing irrespective of the pay.

Financial independence is desirable because it frees you to do the things you love doing irrespective of the pay. Click To Tweet

In this article, you will find a formula that helps you calculate when you will achieve financial independence with your current savings and spending patterns. Investing your money very early in life can help you reach financial independence early.

Achieve your Financial Goals

Retirement and financial independence are examples of long-term financial goals investing can help you achieve. You can achieve other short and medium-term financial goals when you invest your money. You might have a goal to buy a new car, pay down a mortgage, start a business, pay your child’s college fees without loans, etc. Investing is a high road to the achievement of important financial goals.

Achieve your life goals

Even if money cannot buy happiness, it is an indispensable tool in the pursuit of happiness. We all have important life goals – things we want to do and accomplish in life. Almost everything (to be conservative) you need to achieve in life has financial aspects. If you’re going to become a missionary in a faraway land, there is a financial aspect to it. If you desire to start an orphanage or any other form of charity, there are financial aspects to it. Investing will help you grow your money and provide the necessary financial base for you to achieve your life goals.

Even if money cannot buy happiness, it is an indispensable tool in the pursuit of happiness Click To Tweet

Make money work for you

One of the temptations with money is to become its servant. However, as humans, we are not to subject ourselves to the rule and reign of money. Instead, like every other part of creation, we are to rule over it. It is very easy for money to rule over us owing to its importance in daily life. One way to resist the temptation (not the only way or an absolute way) is to invest and allow money to serve you. Investing allows money to work for you, which can give you the psychological impetus to resist the rule of money over your life in other areas. When we see money as a mere servant (though an important one), it changes our perspectives on many things in life and makes us better people.

Investing allows money to work for you, which can give you the psychological impetus to resist the rule of money over your life in other areas. When we see money as a mere servant (though an important one), it changes our perspectives… Click To Tweet

Leaving an estate for your children

There was a time when a son or daughter inherits the job of the father and mother, respectively. We no longer live in that time. You cannot give your job to your children. But you can leave your assets to them. We may live in a world where the whole idea of inheritance is not as important as previous centuries, but it is still a reasonable desire for a parent to nurture. Investing will help you leave an estate or inheritance for your children who can’t inherit your job.

Conclusion

This quarter, we will be looking at various exciting topics on investing. The aim of the above is to set the stage for what comes afterward. When we understand the importance of investing, we will gain a deeper appreciation for everything we will talk about this year.

Investing your money is the high road to building wealth and living the life of your dream. It is therefore essential to develop the knowledge, skills, attitudes, and competencies to become a good investor.

Cheers to a Financially Productive Year

January 7, 2020 by Paul Owolabi Leave a Comment

I want to use this opportunity to say a happy new year to all the readers of this blog.

A new year offers us fresh opportunities to rethink our priorities, evaluate our plans, and the overall direction of our lives. Before the end of 2019, I wrote an article on how you should tidy up your finances as we approach a new year. The New Year is finally here, and it is time to resume from where we stopped. Before we begin to explore what is in store for this year (and there are many exciting things in store), I would like to start by making some general points that will make this year a financially productive year.

The learning must not stop

The choice is never between progress and stagnancy; it is always a choice between progressing and retrogressing. Man is never stagnant. We are either becoming better or worse. It is not the size of the progression or retrogression that matters, it is the fact of it.

In this New Year, never stop learning. Readers, they say, are leaders. Information is the heartbeat of every transformation, and we are not the first people to discover that. You cannot grow beyond your knowledge. Therefore, to achieve growth and progress, commit to continuous learning.

Subscribe to blogs, read books, subscribe to podcasts, join a forum, and keep exploring various means to improve your knowledge in the realm of personal finance.

Alvin Toffler says it best, “The illiterate of the 21st century will not be those who cannot read and write, but those who cannot learn, unlearn, and relearn.”

Your goals are valid

Don’t be afraid to dream. Every successful person has been put down for his or her lofty dreams. People will tell you the reasons why your dreams are invalid. You must tell yourself why they are valid. Do you want to start that business this year? Your dream is valid. Do you want to achieve financial independence before you are 40? Your dream is valid. Do you want to pay off your mortgage in half the time? Your dream is valid.

Do you want to start that business this year? Your dream is valid. Do you want to achieve financial independence before you are 40? Your dream is valid. Do you want to pay off your mortgage in half the time? Your dream is valid. Click To Tweet

What matters is that you have a clear strategy/plan and the commitment to see it through.

“We will only grow as big as we dream that’s why we must dream big” – Gabrielle Williams

Information is better than ignorance

It is good to act fast, but it always bad to act fast in ignorance. Take the time to increase your knowledge in that area before you make your decision. The only time you should not take is time for paralyzing fears and doubts (there are some informative fears and doubts that are valid). Do not make financial choices (or any choices for that matter) out of ignorance. Ensure you are familiar with every opportunity, platform, service, offer before you take the plunge.

Do not make financial choices (or any choices for that matter) out of ignorance. Ensure you are familiar with every opportunity, platform, service, offer before you take the plunge. Click To Tweet

Misinformation can be worse than ignorance

While ignorance is not bliss, misinformation is catastrophic. Not every information peddler out there has your best interest at heart. Some only care for their bottom line. There are so many untruths out there. Many personal finance wisdom are disguised marketing strategies to take you in. Be alert. Read trusted blogs and websites and follow trustworthy mentors. The biblical principle of justice, “in the mouth of two or three witnesses shall every word be established” can be a lifesaver in this context. When you are not sure of the truthfulness of any information or the goodwill of the informant, seek out other trusted people to get confirmations.

While ignorance is not bliss, misinformation is catastrophic. Click To Tweet

When the uninformed argue with the misinformed, there is no need to choose a side – Carmine Savastano

Don’t just learn, do

While you should not act in ignorance or on misinformation, you should also not live in indecision. Learning without doing is useless. Everyone wants to change the world, but only a few are even willing to get out of bed. Writing out your goals is never enough. If wishes were horses, even beggars would ride. A good plan is not the same as a good life. Well-structured, SMART goals make no difference when there is no commitment to act. As Tony Robbins puts it, “The path to success is to take massive, determined actions.”

Everyone wants to change the world, but only a few are even willing to get out of bed. Writing out your goals is never enough. If wishes were horses, even beggars would ride. A good plan is not the same as a good life Click To Tweet

Always keep the big picture in mind

Don’t just set goals for the year; let those goals flow out of your long term goals and life pursuits. It is easy to live in the here and now and forget the “there and then.” Never take a short term approach to life. Let your winnings today be the type that prepares you to win in the long run. Let the victories of today contribute to the utmost victory. Let your long-term goals and life pursuits be clear, then your yearly, monthly, weekly, and daily goals can flow from them.

Never take a short term approach to life. Let your winnings today be the type that prepares you to win in the long run. Let the victories of today contribute to the utmost victory. Let your long-term goals and life pursuits be clear,… Click To Tweet

“Never let a short term desire get in the way of a long term goal.” ~ Curtis Martin

Live a unified life

This is one point I tried to make many times over last year. Yes, there are different aspects of life. However, the key to living a successful life is to keep them integrated. Don’t treat your money as just one part of your life disconnected from all others. Live an integrated life. Let your financial goals flow out from your overall life goals (you can replace the word “financial” with every other aspect of life). Money must never be an end in itself but a means to an end. If you treat money as an end in itself, you will become a slave to mammon. But when you keep your life goals in view, you will see your money as a servant and not a master.

Money must never be an end in itself but a means to an end. If you treat money as an end in itself, you will become a slave to mammon. But when you keep your life goals in view, you will see your money as a servant and not a master. Click To Tweet

“And an integrated life is one where you’re able to fit the different pieces of your life together in a seamless fashion.” – James Collins

Conclusion

Once again, I wish you a financially productive year. Like every year, it is a year with many prospects. Take charge of your finances this year, get the proper mindset, and you will be on the way to incredible progress.

Tidying up Your Finances As We Approach a New Year

December 18, 2019 by Paul Owolabi Leave a Comment

Many excitements accompany the approach of a new year. One reason for this is the holidays. The holidays provide an opportunity for us to spend time with family members who live in different places. The period leading to a new year is a great occasion to solidify family relationships and enjoy each other’s presence. Another reason for the excitement is that a new year provides fresh opportunities to do the things we could not do in the previous year and to make new plans and create new goals. While the former reason tends to be the major one, the latter is crucial for those who live their lives in pursuit of excellence – people with concrete plans and visions.

In that respect, how should we approach a new year as students of personal finance? As people with concrete plans ad visions of which our finances form an integral part, what should we look forward to as we approach a new year?

Count your blessings

It’s very easy to beat yourself up about the things you could not achieve. But as you look back over the year, the first call of duty is to count your blessings. Look at the financial goals you set for yourself at the beginning of the year. How many did you accomplish? Be grateful for the goals you achieved and even for the things you realized without planning for it. Were you able to improve your credit score? It’s a blessing. Did you get that stock at a reasonable price? It’s a blessing. Did you achieve the exact value of assets you targeted? It’s a blessing.

It’s very easy to beat yourself up about the things you could not achieve. But as you look back over the year, the first call of duty is to count your blessings. Click To Tweet

When evaluating the outgoing year, remember the things for which you can be grateful. Do not end the year on a negative note. Count your blessings and enjoy the feeling.

Be honest about your failures

Counting your blessings does not mean you ignore your failures. It means you are putting your failures in the right perspective. If the first thing you do is think about all the things you didn’t do, you will approach the new year with a negative attitude. But if you first enjoy your achievements, you are in the right frame of mind, to be honest about your failures.

Did you fail to clear off those credit card debts? Admit it. If you made wrong investment decisions, own up to it. If you went over your budget for no good reasons, be honest with yourself. Acknowledging our failures is essential to making progress in life. Denying them will only give us a false sense of victory. Better to admit the wars you won and those you lost so you could be in a better position to win the battle. Write down your success, but don’t forget to write down your failures as well. But never forget the order. The order is everything.

Write down your success, but don’t forget to write down your failures as well. But never forget the order. The order is everything. Click To Tweet

Plan for the holidays

Ideally, your budget should include specific provisions for the holiday season. If you have family around, you need to make provision for them. However, this does not mean you should go over the top. In this article, you will see nine ways to save money in the holiday season. So while making your plans, ensure you stay within your budget. But don’t allow the desire to save money make the holiday less memorable for everyone. The key here is getting the right balance and exploring the nine steps in the referenced article.

Review your budget

How well did you perform? Did your actual expenses equal, exceed, or fall short of your budgeted expenses? What categories of expenses are responsible for those deviations? Is it a bad thing or a good thing? Do you need more significant emergency funds to avoid such variations? Do you need more accountability? Maybe you even need software to better track your expenses.

This step is essential. It will help you identify the factors that are causing deviations so you can make plans to achieve better congruence. Deviating from your budget is not always a bad thing (unforeseen circumstances and situations out of your control). Still, this process will help you identify if the causes of deviations are within your purview or not. If it is the former, then you can do something about it. You should.

Create a new budget

Will your budget for the outgoing year serve you, or are there expected changes that will cause some differences? What’s the nature of those changes and how significant are they? Such changes may be a raise, new mortgage, a debt you want to clear off, marriage, a new child, among others. You will have to try and forecast how any of these will affect your budget for the new year and incorporate them in the new year. A budget is not a static document. It must grow with you as your lifestyle changes.

Evaluate your portfolio

You must not ignore this one area as the New Year approaches. Review your investment portfolio. Your portfolio is an essential part of your finance. It is the goal of all other personal finance habits. The goal is to build good assets and investments, achieve financial independence, and achieve important life goals.

One thing you are looking for is the diversification of your portfolio. Is your portfolio well diversified or concentrated in one particular asset class? Another important consideration is the risk and returns matrix. Are your investments earning you the right return at the risk level? Are there better opportunities with similar risk but higher returns or same returns at lower risk? It is very easy to invest in an asset class and assume it’s the best deal, whereas there are better alternatives out there.

Is your portfolio well diversified or concentrated in one particular asset class? Another important consideration is the risk and returns matrix. Are your investments earning you the right return at the risk level? Are there better… Click To Tweet

Revisit your short-term goals

Start from the failures of the financial year. Do you still want to pursue those goals you could not achieve? Do you think the problem is with the goals themselves? When designing your short term goals for the next year, you should look for new and better ways to achieve the goals you failed at in the outgoing year (as long as you think those goals are still relevant)

When designing short term goals, ensure it flows out from the long term goals. The harmonization and congruence of goals is key to any long-term success. Your goals for the next year should not be independent of your life goals and your long-term goals. Don’t forget to evaluate how your short term goals will affect your budget.

Continue to learn

Make a plan to read more personal finance books, follow more personal finance blogs, podcasts, magazines, et al. However, it is not just the quantity but the quality. Look for quality blogs, books, podcasts, and magazines that will aid you in your journey. Remember that not all finance experts are really after your welfare. We die intellectually the day we stop learning. Don’t put the brakes on it.

Conclusion

Take charge of your finances. No one will do it for you. The new year is another opportunity to be active rather than passive about your financial life. Follow the steps above, and you will be in a better position to achieve great strides in the new year.

I want to wish you a happy new year in advance. Till we meet again next year, please remember to subscribe to this blog.

Factors to consider before buying a home

December 10, 2019 by Paul Owolabi Leave a Comment

Introduction

Buying a home is one of the key financial decisions that most people will have to make at one time in their lifetime. We have already addressed the question of whether you should buy a home or rent a home. In this article, we look at some examples of factors to consider before you make the actual purchase. This article does not look at factors to consider in choosing between buying and renting, but factors to consider after you have chosen to buy.

We take a brief look at some of these important factors.

Budget

The current state of your monthly budget will determine the type of house you can afford. Owning a home is great, but it should not be at the expense of other financial goals. You should carefully evaluate your monthly budget and decide the amount of mortgage you can take on every month without impeding other essential expense items (food, clothing, transport, retirement, etc.).

Owning a home is great, but it should not be at the expense of other financial goals. You should carefully evaluate your monthly budget and decide the amount of mortgage you can take on every month without impeding other essential… Click To Tweet

Credit Score

The state of your credit score will determine the type of mortgage deals you can get. If you have a bad credit score, it will be difficult for you to get good mortgage deals. In that case, it is wise you take a pause and improve your credit score rather than plunging into bad mortgage deals. An improved credit score will get you better deals.

If you have a bad credit score, it will be difficult for you to get good mortgage deals. In that case, it is wise you take a pause and improve your credit score rather than plunging into bad mortgage deals Click To Tweet

Financial situation

Do you have a stable job? Alternatively, do you work in an industry or company where job loss is common? If you own a business, what is the current state of the business, and what are your future expectations? Are you funding your retirement account? These factors are important to help you decide if you can truly afford a home.

Also, consider the other costs that come with homeownership apart from closing the mortgage. Can you afford the property taxes, homeowners insurance, private mortgage insurance (optional), maintenance and repairs, homeowners’ association fees, among others? When evaluating what you can purchase, you need to factor in these expense items.

The amount you can set aside as down payment is another important financial consideration. Can you set aside up to 20% of the value of this home without sustaining a “financial injury”?

All these factors are essential to your purchase decision.

Location

The location of the property is another essential factor. How accessible is your workplace, business location, children’s school, place of worship, and other key locations in your life? We all have some key parts of our lives and some of those key parts are location-based. Are you willing to compromise on your place of worship or children’s school? Are those two as important as your workplace? When deciding on a property, the location is very important for the sake of comfort.

Facilities

Does the location have important facilities and infrastructures? Are there good shopping malls, supermarkets, hospitals around? For some people, a gym or a cinema is an essential facility. It is important to know the facilities and infrastructures that are essential to your lifestyle and look for a location that provides them.

Future Value

Another important factor when buying a home is the prospect of the property. This is especially important if you plan to sell the property. However, even if you don’t plan to sell, when the value of the property increases, you build up home equity, which is a valuable resource to your financial life. Look for properties in a location where there is a prospect that the value will increase rather than decrease.

Convenience

What is convenient for a single person is not convenient for a couple without a child. What is convenient for a couple without a child will be inconvenient for a couple with three children. Understand your current life situation and choose a property that will give you convenience. The property should have features and aesthetics that will make life more convenient and comfortable for you.

Real Estate Market

If possible, try to buy a property during a bear market when prices are down. It is important to keep a tab on the real estate market and watch out for such opportunities (as long as time is not a factor).

Goals

At the center of it all, you must keep your financial goals before you at all times. Will buying a house help fulfill your financial goals? If yes, what type of house and at what cost? Your long-term goals should be a priority in all your evaluations.

Conclusion

These factors are not comprehensive. There are many other factors you need to consider. However, the more important point is to understand that none of these factors stand alone. You must consider every single factor in light of the others. Also, some factors may be more important than others for your specific case, which means you will need to make some compromise. For example, the presence of a gym is not as important as the prospect of the property. A convenient place close to your workplace may be more important than a place that is inconvenient but close to your favorite shopping mall.

The key here is to decide what is unavoidably important and evaluate all of these factors with that sense of priority.