Making financial plans and investment decisions can be a very daunting task. These plans and decisions are different for each individual as individuals’ investment needs are different. It may also be difficult to get an unbiased investment advice as you make such plans and decisions. Whether you are just beginning to make plans for investment or you have already embarked on some investment programs, that’s ok. However, it is important to consider these requirements to help you make investment decisions and to inform the conversations you may have with your financial advisor.
INVESTMENT REQUIREMENTS
While you make your investment plans, make sure that you have adequate income to meet your living expenses. You should also have maintained a safety net to cover for emergencies. You heard me right! It is important that you are able to cover your living expenses and emergencies so as to not jeopardize your investment efforts. Let’s look at these requirements and why they are very important.
Insurance
Some people are not too keen to obtain insurance coverage. While insurance is not investment, a key step to sound financial plan is to have adequate insurance coverage. Life Insurance should be a key component of any financial plan. It provides protection to loved ones against any financial hardship should death occur before we reach our financial goals. Insurance benefits paid to loved ones can help them cover the funeral expenses, pay medical bill, maintain their lifestyle, and pay debts. They can even be invested towards kid’s education or for retirement.
Life Insurance
In our African culture, families believe that celebrating the life of the deceased with big gatherings is a way of paying last respect to the deceased. Meeting funeral costs has been a communal problem. This culture is gradually dying, leaving these costs to be met by the deceased immediate family. The bread-winner disappears, the children suffer. So, one of the key steps to any sound financial plan is to purchase life insurance to ensure that our loved ones have financial cushion when we are no longer there.
Health Insurance
Insurance can also be used as a protection against uncertainties. Health insurance as an example can help one pay medical bills. The rising cost of healthcare can be a threat to a good investment program if not adequately planned for through health insurance. Disability insurance can provide source of continuous income should one become disable and unable to work.
Auto and Home Insurance
Automobile and home insurance provide coverage against automobile accidents or damages to cars or homes.
Lack of adequate insurance can destroy even the best planned investment program by being forced to sell investments just to meet these unexpected. While Insurance programs in Africa need significant improvement, there is need for us to begin to understand the importance of insurance. We need to understand why it should be a significant part of our efforts towards achieving financial security. Insurance is an area that Africans need to explore more and probably consider investing more in to make it functional. This is also an area that needs more enlightenment or reorientation.
Cash Reserves
It is important to have cash reserves to meet emergencies, layoff, and other unforeseen expenses that may happen, and also to take advantage of good investment opportunities that may come up. Cash reserves provide safety cushion and reduce the possibility of being forced to sell off investments at inopportune times just to meet up with emergencies. It is recommended to keep cash reserve amount equal to six months of living expenses. While this is a generally recommended reserve amount, this amount may differ from individual to individual. Depending on your situation, you may need to reserve for more than six months.
Recommendation
Employability is one factor to consider as you plan your reserve amount. Most people have not updated their skills for a very long time. The question to ask yourself as you make this plan is this: If there is any risk of layoff, am I easily employable? If the answer is no, it is recommended that you keep up to one year of living expenses as cash reserve. Cash reserves must not necessarily be maintained in “cash” as the name implies. They should however be in investments that can easily be converted to cash with little possibility of loss in value. Cash reserves can be held in the money market or short term bonds, mutual funds and/or bank accounts.
Concerned About Low Earnings?
A common question to expect with this recommendation is “how do I get this cash reserve since I do not earn so much to even cover my current expenses?”. “I cannot afford to keep up to one year of my living expenses, what do I do?”. The answer is simple, pay yourself first! The moment you receive your salary or any income, and before making any expenses, put away a certain amount as a payment to yourself.
Begin paying other bills and expenses after you have paid yourself. What happens is that you will find yourself working with the amount you have left, and will more likely allocate it wisely. Otherwise, you will be forced to think of other ways to create more income. But the idea is that you will pay yourself first and still meet your current expenses. At the same time, able to meet your emergencies and plan for long term investment to achieve long term goals.
Conclusion
Just like insurance, having adequate income to cover living expenses and emergency fund are among the key elements of financial well-being. They allow serious investment plans to run smoothly without the risk of being liquidated at an inopportune time. Whether you are seasoned investor or a beginner, make sure you have your cash reserves and get insurance coverage that meets your needs.
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Remember, it is possible to end poverty in Africa through financial education.
