How to get your money work harder: The power of compound interest

photo credit: investopedia.com

Every investor is looking for investments that pay more over the shortest time possible with low risk. In the course of maximizing returns, some turn to endanger the funds due to the risk attached to high return investments. Others in the quest to minimize risk turn to miss the opportunities of making high returns.

So then, how can you still make more money and still avoid risk as much as possible? It's simple -Make every cent, kobo, pesewa you earn work harder.

Some of you work so hard but you make your monies slack off. I will be bold enough to say that most young business men and women go through sleepless nights to remain profitable. Even people staying at home and not working go through a lot of stress just to keep the house in order and the family happy. So why would you make your money sleep or rest? Why would you rather prefer to pamper your money than get it to work?

Well, I am very sure by now, most of you would say, “Oh but I invest” meaning my money works for me and that’s enough. Just know that, it’s not enough. If you begin to see investment as a culture, a lifestyle, you will make sure every penny is working harder at every time.

And why we invest, we forget how powerful compound interest is and hence jump from one investment to the other and only relying on simple interest.-How much I will make from this investment today. We often don’t take note of how much we will make from this investment when we reinvest what we got from this investment yesterday, today and then reinvest what we get today, tomorrow and the day after.  

source: batr.org

Young investors just look for one-shot investments, make their money and go away. They miss the power of compound interest. When I brought this up among some funny friends, they cited the DKM experience where investor who wanted to compound ended up losing all their monies. That is not the sort of compounding I am talking about. Suppose you found a safe investment giving you 12% interest per annum on your Ghc 400. In 7 years time, with simple interest, your investment will earn 400 x 0.12 = Ghc 48 every year and that will amount to Ghc 336 by 7 years. However, if you use the power of compound interest by investing the principal and the interest, you will double your money in 7 years by getting Ghc 484.27 extra on your Ghc 400 investment. The difference is (484.27-336 = ghc 148.27). If you think ghc 148 is just a small difference, just add 4 zeros to it and see what you will lose or gain by making your money work harder or not.

You don’t need much to become very rich in the future. You just need to allow the money to work and allow time to pass. To take an extreme case, suppose one of your more frugal ancestors had invested Ghc 5 for you at a 6% interest rate 200 years ago. How much would you have today? Let me help you, it will become Ghc 575,629.52 today. But wait a minute, notice that, the simple interest is just Ghc 5 x 0.06 = 0.30 pesewas per year. And then 0.30 pesewas X 200 years = Ghc 60. So where from the huge amount…. That is the Power of Compound Interest.

My advice to you is to take advantage of these high interest rates we have in the Ghanaian economy. The Bank of Ghana keeping the policy rate at 26% should only make you put more money to work and make sure you roll-over your principal and interest. The 91-Day treasury bill is around 22% and that's a good thing. Go for it. Constantly keep every penny working hard and if you wait long enough, it will always be beneficial to invest.

photo credit: pfguru.com

Having a bank account is not enough to make you prosper.

There is a tagline in an advert of a popular bank which says they are there to make you prosper. Even though I believe they may be doing their best to actually live out that tagline, I have become aware that owning a bank account is not enough to help anyone prosper.
Before I proceed, let me first clarify that I have absolutely nothing against the Banking industry, neither do I have anything against any banker or bank. I personally have bank accounts and I also have a number of friends who are bankers and I know they are doing a fantastic job for the economy. I however want to address the misconception some people have that owning a bank account is enough to make them prosper.

How the Ghana Cedi performed against the US Dollar in 2014

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Courtesy: freecurrencyrates.com

How to start investing (104); Various Types of investments in Ghana; The Money market..

The Ghanaian investment community has been developing every day and it is good to know that, the other side of the investment coin (the money market) is very rewarding as compared to other economies on the African continent or the whole world as a whole.

The money market trading involves trading of low risk securities which are usual short term unlike the capital market. Most people perceive this market as less rewarding since it is a low risk market. But in a developing country like Ghana where Treasury bill rates are above 12% and other low risk rate securities are becoming good investments, what else can you think about than to venture.

Let us now look at the various short term securities in the Ghanaian investment community and how to take advantage of them.

First, is the Treasury bill which is a product of the Bank of Ghana on behalf of the Government of Ghana. It involves lending your money to the Government at a fixed interest rate. This rate is fixed and there is very little or no risk at all when it comes to payment.  The Treasury bill is in form of 91-day bills, 182-day bills or 364-day or 1-year note. Each of these bills has separate fixed rate interests and mature after such days after which the Government will repay the principal plus the interest on it to the investor. Most commercial banks and brokerage houses in the country offer this investment on behalf of the Bank of Ghana. It is safe and short term.

Another investment in Ghana is the Certificate of Deposits (CD). This investment is a financial document showing that a person or organization has a specified sum on deposit at a bank, usually for a set period which comes with an interest rate. Most large companies in Ghana invest in this and very few individuals get the chance to invest in this because in involve very high amounts.

Fixed deposits are another form of investment in Ghana offered by most commercial banks at attractive rates. They are safe and good for low risk takers or investors. Most people also consider savings accounts of the various commercial banks as investment option. In Ghana for instance, banks offer attractive interest rates on the accounts of money savers hence people prefer them to other investments.

Investors must note that these short term securities are good especially for low risk takers but must be understood properly. These are not good for all investment goals especially those targeted at creating wealth. Most of the time people used these investment options to maintain the value of their money over some time.

Keep learning about them and take advantage of them.

How to start investing (102); Setting the Investment Goal.

The journey to success in investment continues as we look at the basics to investing.

Every good investment should have a goal or an objective. Setting an investment goal is important and must be taken seriously by every aspiring investor. Do not look at a friend’s success in the stock market and just rush to invest. There should be a reason to invest. This objective would help select the best investment to undertake with respect to your risk profile and time horizon.

Setting investment goals like, “I want to invest in order to be very rich” is not realistic and too vague. Investment goals must be realistic and very specific.

You can set a target amount to hit by a particular time. This would advise your choice of investment. People set investment goals to pay school fees, pay bills, service debts, build businesses and so forth.

Setting a good investment goal does not guarantee success of investment but it gives purpose and direction to the investment. Success of the investment would depend on the investment itself and market activities. Getting your funds into the right investment at the right time would make you a successful investor. Do not be afraid of losing your money, just get the basics right.

To start investing, an individual must select an investment to suit the purpose and risk profile. Each investment has an amount of risk, meanwhile some investment risks are so insignificant, and hence such investments are called risk-free investments.

In the next post, we would continue with the investment series and learn about the various investment options in Ghana.

Follow the next post, “How to start investing 103: Various Types of Investments, in Ghana and the risks.”