How Do I Grow My Money?
As a kid, my friends and I would fantasize about the Richard Pryor movie, Brewster’s Millions. In this movie, Richard Pryor’s character has to spend (not invest, spend) 30 million dollars in 30 days without having anything left at all. We would argue about what to do with that kind of money and think up different ways that we could squander 30 million bucks and eventually someone would just decide it’s easier to take the money and run off with it.
So let’s play the same game, but with a slightly different set of rules. First off, instead of squandering our money, we are going to find ways to make it grow. 2nd, instead of 30 days, we’ll increase the time-frame to 1 year. Finally we’ll change the amount. It’s easy to invest 30 million dollars. What if you only had one hundred thousand Naira? If you can successfully invest a hundred thousand bucks, 30 million in your account wouldn’t be a problem. [wink]
1 – Money Market Funds
The first way I would invest a hundred thousand Naira is in mutual funds, specifically Money Market Funds. A Mutual Fund is a type of investment where an investment company pulls together money from different people to invest in various things. With a Money Market Fund, the company invests this money in Money Market instruments like government bonds and treasury bills.
To put it differently, you and a bunch of other people are basically loaning the government and other big organizations money at very good rates.
So why Money Market Funds and not the other gazillion types of mutual funds?
The Pros
- This investment is relatively safe – Because usually your principal i.e. the money you’re investing, remains intact even if the interest rates fluctuate. Think of it this way: You are basically loaning the government money and so long as the country remains intact, your funds are safe
- The entry requirements are pretty low – You can start with as low as N1,000. If you had to invest directly in government bonds, you’d need nothing less than a million Naira
- You can easily access your funds – Unlike an actual money market instrument where you can’t liquidate mid-way through an investment cycle, you can always stop your investment and withdraw your funds at any time with no impact on the principal invested. Only the interest would be affected
- The returns are usually good – In the past 5 years, the average rates for Money Market Funds in Nigeria have been about 14% and this is not accounting for the 2016 recession when the rates dropped below 7%. This is still higher than the average inflation in the same time frame and definitely better than most other investment options in a similar category (e.g. savings accounts)
- You really don’t need to learn anything new. Just deposit your money with the investment company, and wait for your monthly returns.
One Pro Tip is to ask the investment company to roll over your investment with the interest accrued each month. This way you benefit from compound interest! To make it even juicier, you could increase your contribution monthly as well, and you’ll see what you have by the end of the year.
2 – Life Insurance / Pension Contribution (aka 401k Plan)
The 2nd way I’d invest N100k is in Life insurance or voluntary pension contribution. I’m grouping these two together for the same reason: they both help reduce your tax burden. What does this mean?
Pension Contributions
Let’s start with your pension contributions. The Nigerian Personal Income Tax Act was last amended to encourage salary earners to plan for the long term. As of today (2018), your employer must deduct 8% of your basic salary and also contribute another 10% toward your pension. This 8% that is deducted from your salary goes untaxed and is invested by your Pension Fund Administrator ahead of your retirement from paid employment. You however have the option of increasing your contribution to the pension and this will also go untaxed.
So why is this a good investment? Consider the fact that the average Personal Income Tax in Nigeria is 24%, take it as a 24% return on whatever you contribute towards your pension. And this is before the PFA begins investing the pensions over your working career. In the long run, your additional pension contribution each month turns into a significant amount.
To increase your pension contribution, you only need to inform your employer and they’ll increase the monthly pension contribution deducted from your salary. Be sure to check this with your Pension Fund Administrator.
Life Insurance
Another part of your salary that is also exempt from tax is your life insurance policy premium. Unlike the pension contribution, this is not deducted “from source”. You need to make the payments first then redeem the taxes deducted after a year.
With the life insurance scheme, a particular amount of money will be paid to the beneficiaries if anything were to happen to you within a specified period. After that period, usually you get your contribution back. The benefit is that each year you make these premium payments, you can reclaim a portion of the tax that was paid on the insurance premium. At current income tax rates, that tax rebate is a good return on the investment.
To get started with the life insurance policy, talk to an insurance broker.
The downside to these investment options is that it’s for the long term and you don’t have access to the contribution or the 24% returns in the short term. You cannot access your pension until you are 50 years old or you’ve been without paid employment for 4 months.
You can however access up to 50% of your voluntary pension contribution after 2 years with the benefit of the 24% tax-exemption and whatever interest might have accrued in that period. The interest will still be taxed though.
For life insurance, be sure to confirm it is a life insurance product and not some other insurance product as the tax rebate only applies to life insurance premiums and not other savings schemes offered by some insurance companies. You need to be very clear with the insurance broker.
Nairametrics has a very detailed article on how tax exemptions are calculated in Nigeria. The article also provides a sample template that you can use to calculate how much tax you will be paying if you decide to increase your pension contribution.
3 – Shares
This is my favourite investment vehicle and my first love where paper assets are concerned. Here it gets a bit more interesting. With as low as N50,000 in a brokerage account, you can easily start investing in the stock market. If you know what to look out for, you can grow the value of that N50,000 significantly. Beside the fact that the value of your investment can appreciate over time, you also receive regular dividend payments, if you buy into the right companies.
However unlike the first 2 investment options where you don’t really need to learn anything new, you can get your fingers burnt investing in shares if you don’t know what you’re doing or if you are just speculating.
I made a video on the fundamentals of stock market investing and I also cover how to select the right companies in a separate post on this site.
4 – Crowdfunding
My 4th investment vehicle is relatively new in Nigeria and is often viewed with suspicion. Crowdfunding is similar to investing in a mutual fund as you basically join other people to contribute toward an investment. The difference here is that the investment is not managed by a financial institution or a government body, instead you’re investing directly with the company doing the business.
Obviously this is a more risky approach as the business is usually not an established one and often has a higher risk of failure. There is also the risk that the company or investment is an outright scam or Ponzi scheme. I’ll put out a separate video on how to recognize a scam later.
On the upside, the returns are usually much higher than the previously mentioned investment options with interest rates ranging from 20% to 40% per annum.
With this type of investment, I usually test with a small amount that I can risk losing altogether, before going all in. Also, it helps if the investment is actually insured and affiliated with more established organizations in some way. Remember, always do your due diligence and try to understand how the business makes profit and what will ensure it stays sustainable.
One particular crowdfunding investment I’ve been active with since January 2017 is FarmCrowdy, an organization that invests in agriculture through crowdfunding. I started investing with them in 2017 and I’ve received my returns consistently since. The best thing about them is that their farms are insured so if anything happens to the crops your funds remain secure.
Another similar crowdfunding investment is Agropartnerships. In addition to their agricultural investments, they also trade in agriculture commodities locally and globally. Feel free to use my Affiliate Code – mod7592
5 – Small Business
Full disclosure here, I’m yet to start this personally but I stumbled on a twitter post about this and you’d be surprised at the number of businesses you could start with just N100,000. My favourites include setting up a popcorn stand, a cleaning service, and a digital marketing consulting outfit.
I’ll hopefully make a video about this sometime in the future when I’ve started one of these, however always remember: a business, like any investment, is only profitable when your income exceeds your expense Do the math and keep your costs low. Also, remember that cost includes your time, because that is time that could be spent on other things. Your goal should be to structure the business such that you are an owner not an employee. In other words, you shouldn’t always have to be there for the business to run. Otherwise you didn’t set up a business; you bought yourself a job.
Let’s Invest
While I’ll recommend you always check with a professional before making any moves with your money, those are some 5 easy ways to get started investing your money. If this has been useful to you in any way, please share with 2 people and subscribe to my mailing list for more tips and strategies to grow your money.