Financial Pillar V: Investing

The American dream is to be able to own a home. Similarly, many immigrants come to America to earn enough money to build their dream home back where they came from. Both of these concepts can be defined as investments. To invest is to place capital into something such as business, property, education, or even people, in hopes of a future return. For the purposes of this post, we will be focusing on the monetary aspect of investing. We will look at why you, as a clever African, should invest in yourself by investing in the future.

History has shown that long-term investment (though it is never without some risk) is a fairly safe way to increase your wealth, by simply using the time value of money as a foundational principle.

There are a few primary ways in which people tend to invest their money: stocks, bonds, real estate, and life insurance.

  1. Stocks: an investment that represents a purchase of a share or partial ownership of a corporation and entitles you to your share of that corporation’s earnings. Stocks tend to be riskier as you are investing in the success of a company, but the returns can be substantial.  Investing in the stock market has historically proven(see graph below) to be a relatively safe place to grow your money long term, with an average return of 7%.
  2. Bonds: a debt investment whereby the investor lends money to a corporate or governmental body that promises to repay the principal (original loan amount), with interest, over a set period of time. Bonds tend to be a safer alternative to stocks as there is more confidence in a professional organization to repay a loan.
  3. Real Estate: the buying and selling of a home for a profit or the purchasing of a home in order to rent out the property to tenants. Any investment in land ownership or property management could be a good investment as the value of property always seems to have an upward trajectory (see graph below). 
  4. Life Insurance: permanent life insurance can be a form of investment because it allows for a portion of your premiums to be invested to accrue a cash value over time.

Consider this example:

A city is looking to build a park and will need an additional $5 million dollars to start the project this year. A firm comes to an agreement with the city and will collect the $5 million from investors and lend it to the city. The city agrees to repay the principal, along with an 8% interest rate over the next 10 years.

If Sarafina decides to invest $25,000 towards the $5 million project; after 10 years, considering a compound interest rate of 8%, her Bond investment of $25,000 will become $53,973.12. This is a $28,973.12 profit that would not have been attained had the money been kept in a typical savings account.

Risk is inevitable, but the key to mitigating risk is to diversify your investments so never put all your eggs in one basket. By diversifying your investments over time, you can financially support your travel aspirations, your dream home, or even your early retirement: it is never too early to invest in you!

THE CLEVER AFRICAN: INVEST IN YOU
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