By Emmanuel D Tayari
There is nothing more important, at this critical time of a year, than
planning ahead on areas of improvements for the next year. One of the
main areas of which I thought all of us need improvement for the next
year, is saving and Investments. To allow us to understand more, I
have collected these notes below from Indiana Department of Financial
Institutions .
What is saving?
In order to have money to save or invest, it is important to have a
plan or budget the money you have coming in. No matter at what age or
how much the money is, you need to have a plan on how you will
allocate it. That plan or budget should always set aside a certain
amount as “savings.” This amount that should be set aside each time
you receive your income (allowance, job earning, etc.) before any
other expenditures. You should always pay yourself first in this
manner. The next question is what you should do with the money you are
saving. You could put it in a piggy bank, a shoe box, or jelly jar.
This method may be OK for awhile until you have some money
accumulated. But at some point you will need to decide what you will
do with your savings. You will want the savings you have to earn
money. Putting your money to work to earn more money is called
investing.
What is investing?
Now that you have reviewed the basics of money, you need to know what
it means to invest your money, how it works, and how you can do it
easily. First we want to tell you about some basic concepts of
investing.
Interest: Interest is the additional money you earn when you lend your
money to others for a period of time. If you put money into a savings
account at a bank, or into a government or corporate bond, you will be
given a certain interest rate. If the interest rate is 5% per year,
then when you decide to take your money back, you will get the
original sum you put in, (called the Principal amount) plus 5% for
each year added to that original sum. For example, if you put $100
into a bank account with an annual interest rate of 5%, after one year
you will have $105.
Compounding: If you keep that same $105 in the bank for another year,
you will earn another 5% on the $105. Thus, in two years your earnings
will equal $110.25. This idea is called compounding. Compounding is
the money you earn on the interest you earned from your original sum.
In twenty years, this original sum of $100 would be worth $265.33.
Without compounding, in 20 years your original investment of $100
would only be worth $200. The example given is for compounding your
money annually. Many types of savings accounts compound quarterly,
which will make your money grow even faster. Your $100 would be
$270.15 in 20 years compounded quarterly.
Capital Gains Tax: All unearned income (income made from investment
gains rather than from working) is considered a capital gain. Capital
gains are taxed
Short Term Investing
There are many ways to invest your money. Some ways are better if you
plan to use your money within a few years of investing it. These are:
Savings Account: A savings account is set up through a bank. A savings
account allows you to put your money aside and earn interest (usually
2-3%) because you are in fact lending money to the bank. You can also
withdraw (take out) or deposit (put in) money as you want to. You can
sign up for a checking account, which allows you to write checks from
your bank account. Often, the portion of the money in the checking
account does not earn interest or if it does, you have to pay a
monthly fee. You can open up a savings account at any bank.
.
Tanzania Government Bond: The government depends on borrowing money
from individuals and institutions to operate. Government Bond is a
safe and reliable investment. The maturity, the date the bond expires,
varies. If the bond has a life of 3-10 years, it is called a Treasury
note. If its life is 10 years or longer, it is called a bond. A 30
year Treasury bond is known as the long bond and sets a standard for
interest rates.
Treasury Bills: T-Bills are also bonds issued by the Government. You
can buy a t-bill with varying maturities from 3 to 12 months; the time
the bill expires you receive your original investment plus interest.
Risks/Rewards: There is low risk in these types of investments. You
know where your money is going, when you can take it back, and how
much you will end up with ahead of time. The downside is that you may
have missed an opportunity to earn more money from a riskier
investment, such as a stock.
About Stocks
Stock is ownership of a company. If you own stock in a company, you
are considered a stockholder (also called shareholder or equity
owner), and you own a piece (or share) of that company. If the company
does well, and the stock price goes up, you benefit. If the company
does not do well, then the stock price can fall and you can lose
money. The price of one share can cost anywhere from a few cents to
thousands of dollars depending on the company. A stockholder can
decide what day and at what price to buy a stock and what day or price
to sell a stock. The goal is to buy a stock low and sell high. This
earns you a profit.
You can either own stock through a broker, a discount broker, an
on-line broker, or through the company directly. A full-service broker
offers advice as well as executes transactions for you. You can call
your broker and request a certain purchase or sale of a stock. The
broker will charge you a fee every time you buy or sell stock. Some
brokers charge as a percentage of the sale or purchase and others
charge a flat rate per transaction. Discount brokers charge less for a
transaction but tend not to provide investment advice.
Stocks are traded at Dar Es Salaam Stock Exchange and if you contact
them they have a list of authorized brokers who can give you a
professional advice on how to invest
Stocks vs. Bonds: One major difference in investing in stocks versus
bonds is that with stocks there is no maturity date. If a company does
poorly, and loses money, a bond holder still gets paid the amount in
the original bond agreement, whereas the stock holder gets no
assurance of a payback.
Lastly I would like to advice young graduates who are entering in the
job Market to be very careful with attractive unsecured loans which
are provided by our local banks. Please don’t rush to take a loan if
you are not sure what you want to do with it, and make sure the loan
you taking is productive in maximizing your income, whereby it will
ensure your ability to pay back,r.