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Kyama Mugambi, an MBA student, kicked off our 'Taming Your Wallet' Series. 
In this fourth part, he discusses the options available for investment.
How can I grow my finances so that I can eventually be financially independent? There are three basic steps that are available to most people. They all fit nicely into one sentence - it goes something like this: Work, save and then invest.
>> Savings Accounts
The savings account is one of the best known and most trusted of the 'money growing' opportunities, if you can call it that. It gives you the lowest returns on your money - contrary to what I heard someone enthusiastically tell me on TV the other day. It is very secure with low risk but the rate of return hardly beats inflation.
For example if you get 5% interest on your money and the inflation rate is 9% per year, then the buying power of the money you save is effectively shrinking by 4%. Very secure but on the other hand... To me, roho safi, it is not a real option for investment, irrespective of what they say on the little fliers they put in the ATMs.
>> Treasury Bonds
To put it simply, these are small loans that the government takes from individuals like you and me. They promise to pay you back with interest within a fixed period, say three or six months. These bonds' lowest denomination is Kshs 50,000 and it increases in leaps of 10,000 from there.
In virtually all cases, the government always keeps its promise to pay back these bonds with interest; which makes them very secure. The interest rates are just a little higher than the savings accounts – which is not much really. Several people I know use them to keep money for a short while before using it for other investments.
>> Mutual Funds
In simple terms, these are moneys pooled together from many people and invested together in lump sums by specialized companies. These companies can do big investments because they have aggregated (piled up) many smaller contributions from many people.
There are many types of mutual funds- for example you can get mutual funds based on stocks, real estate, investments abroad or even combinations of the above mentioned. This kind of investment usually has some good returns based on how well the economic environment is doing.
There is a considerable level of risk with this investment opportunity, however generally the returns tend to beat inflation. One down side of some of these investments is that small investors like you and I have to put in a big chunk [say 250k!] and leave it there for a while [a year or more] before we can get something substantial out of it. If you are not in a hurry to get the money out then its not such a bad idea.
>> Stock Exchange
These are investments based on owning portions of companies. You can buy 'portions' of companies [shares] in a market [stock exchange] through brokers. In Kenya it is very easy to buy and sell shares if you have an account called a CDS account. It enables the shares to be transferred to and from your account electronically. [They say that one day you will be able to do buy and sell shares in Kenya on-line... I can't wait to see how it will look like..!]
The principle is very simple – buy shares at a low price and sell at a higher price. Shares of good stable companies will nearly always rise in price in the long term [2-10 years]. In the long run accumulating shares from good companies will give you good returns when the price of the shares goes up and remains there. Every once in a while they will give you a small 'piece' of their profits [dividends].
However trading shares in the short term can be very risky because prices rise and fall very rapidly. The potential returns on the stock exchange are very high. Trading in the stock exchange takes some getting used to and so I tell people to try it with small amounts of money consistently for a couple of years to get the hang of it.
>> Private Business
 This is when you alone, or together with some friends start a small business. It takes time, effort and money to do business. The risk is also high because of many factors in the environment. Despite the risk, of all investment opportunities, private business has the potential for the highest returns.
My view about private small business is somewhat radical- I think that anyone with access to internet here in Kenya, reading this article now , may have what it takes - the education, exposure, time and probably money - to start a business that may one day give them [and eventually our country] financial freedom!
>> Caution!
Caution 1: You may lose some money in investments for one reason or other. This is normal and in many ways expected. This is why you need to enter into it one step at a time, and gradually build confidence and competence in whatever investment instrument you choose.
Caution 2: There are many organizations out there who offer incredible returns on investments through what are infamously called “pyramid schemes.” These schemes nearly always collapse and with them go many people's money. Here are some questions I like to think about before getting into an investment [especially if it offers crazy profits]
1. Do I understand the business and how it makes money? I know this is controversial, but I personally would be much happier knowing how my money is made in the business. If I don't understand it all then I take a step back. Si kwa ubaya, I just have seen too many relatives and friends who lost their money.
2. Is it legal? Has it been allowed in Kenya [and/ or other countries]. If it is illegal then I will have none of it.
What do others around the world have to say about it? The internet is a great source of information. Please do some google-ing to see if there is any material published about the organization and if someone has some cautions about it. Now, of course there are a whole lot of haters out there hating on your favourite investment company. However I think you can get some red flags that would be helpful.
3. Can it wait? Some of these schemes promote very aggressive sales initiatives that leave you feeling stalked, cornered and abducted. In every investment opportunity I like to feel like I can make the decisions and take responsibility for my investment without being rushed by anyone into it. After all since I am answerable to God for the money he gives me – I need to be able to think properly through my decisions on how to steward it.
4. What is my gut feeling? I will be the first to admit that my gut's feelings are fairly easily swayed by good profits. Having said that, every once in a while you will have a feeling that something is not right. Don't dismiss it. Use the opportunity to pray for God's wisdom and direction. Use it also as an opportunity to do more research.
Note: One of the key detractors to developing financial freedom, especially when you start investing and getting good returns, is greed. How do we deal with it? In the final installment of the Taming the Wallet series we will look at a stewardship principle that provides, among other things, the antidote to greed.
Meanwhile, INVEST WISELY!
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