This is a financial distress message to my DM.
“My name is Kathleen. My friends call me Kathy. I'm a single mother of one. I have a decent, salaried job at an insurance firm. Also, I run a grocery side hustle. From both incomes, I'm able to save Ksh35,000 on a good month. Problem is, I lack investment skills. This money just sits in my bank account. Besides, my child is getting into high school, and school fee requirements have increased.
With my current financial set up, is it advisable to get an education insurance plan? I’m confused.
Can you suggest a simple roadmap to investing I can consider?"
I am no financial expert, but I have had a some experience with financial products. In recognising the challenge that single, working parents with little investment knowledge face, I engaged a professional investment consultant to put together this article that should serve as an exploration of options one has for their savings and not in any way or form be construed to be investment advice.
Always take investment advice ONLY from a licensed investment advisor. My aim with this article is for awareness purposes as we all are going through this journey of figuring out the best way to get the most of the money that we have.
Single parenthood is a little like riding a bike. Except that, you are riding it backwards. All this while, you are juggling a couple of balls in the air. It's not common to purposely choose single parenthood, but once it happens, one has to deal with the balls the best way they can.
Also Read: 7 Key Money Mistakes Single Parents Make
The most delicate of these balls is financial stability - for self and loved ones.
In a nutshell, this single mother seeks a simple-to-follow roadmap to investing. Here is a soft approach, which offers to build security - and yet, some fluid liquidity to handle emergencies and short term financial needs.
To start off, at this point - an education insurance policy may not deliver what you need. There are better options, in my opinion.
It’s also prudent to avoid keeping money idle in a bank account. That incurs costs, with zero returns.
The basic tip is to stack the savings in a place with better returns than a bank's savings account.
The next best options are split evenly between a Money Market Fund (MMF), and Sacco shares that earn an annual dividend. In this case, the single mother can ride along with both options.
To build a good portfolio, it's vital to prioritise liquidity and security in the early stages. That lends it a good foundation, in my opinion. This is because, you do not want to stand the risk of losing your life savings while you are still trying to acquire foundational assets and neither do you want to have all your money tied up in an illiquid asset such as real estate when you need a significant amount of cash fast - in both worst-case scenarios, you will have to get into debt.
Split the existing savings into three parts: as follows:
The first part of the existing savings is used to create an emergency fund. Also, specific monthly allocations continue for the first six months. An emergency fund account is not an ‘ever-green’ account. This means that a target amount is determined, and saving done towards that target.
For example, the single mum can set an emergency fund target at Ksh120,000 (Six months of Ksh20k monthly expenses). She then allocates a monthly amount, for a specific number of months. Maybe, six months allowing her to reach the target.
You can choose to keep your emergency fund in a money market account to earn more interest.
After the six months, or when she attains the target - whichever comes first - this account can then be used to save for other short term expenses - this is without EVER withdrawing the emergency fund amount, unless an ACTUAL emergency occurs. Short term expenses include school fees, vacations, household milestones - say, birthday parties, and so on.
Note that everything else should not exactly be suspended until the emergency fund is fully funded. You have to allocate part of monthly income to other savings goals. So, if you need to, you can stretch the funding period to even over a year and half, as long as you diligently add funds to that account.
This is an account with a sole purpose of accumulating funds that enable you to pursue long term investments. This account also demands a target amount, or target savings period. This target amount or period is dependent on the specific long term investment one is willing to pursue.
For Kathy, some of the long-term investment options include real estate, stocks, mutual funds and government bonds among others. The idea is to first build up enough capital as you explore your risk tolerance and learn more about investment options available before committing your money.
Read Also: Investing for Beginners: How to Get Started
Investment 101: Most Popular Investment Types in Kenya
Sometimes, people get mixed up when talking of treasury bonds and treasury bonds. Let me explain, for Kathy’s sake, too. It’s a viable option.
The main difference between the two is the maturity term. The treasury bills also known as the T-bills have maturity periods of one year. It’s all about offering the government loans on short term. This comes with very attractive returns.
On the other hand, government bonds are investment instruments with maturity periods of more than one year. If an investor waits until maturity, they get their principal back, along with its interest. Of course, this has relatively higher returns than T-bills.
For Kathy, she can start off with both T-bills and government bonds. To handle high school fee structures, these investment options can be timed to mature coinciding with fee payment points. It’s a win-win.
If she has the fees handled, the T-bills or government bonds can be rolled over to the next investment cycle.
Once a member joins a Sacco, they start saving on a daily, monthly - whenever income comes in. The deposits are converted into shares, which allow a member to borrow funds against their savings. For most Sacco’s, there’s only a 3-month holding period for a new member to qualify for a loan.
For Kathy, our single mother in a dilemma, this is ideal.
She can use her account to build extra savings, which also partly acts as an emergency fund. In this case, she’s within reach of an emergency loan usually processed within 24 hours. After a while, say six months, she can take a loan - three times her savings - with generally low interest rates.
Study the habits of the rich, and wealthy. They lean towards investing. But, then - you need resources you can invest. As a beginner, concentrate on ways of growing and saving your income to build a nest egg for investing.
After 1-2 years, you’ll have a sizeable amount - in savings. It’s time for long term investments. Start buying cash-producing assets. Diversify that portfolio, as the wealth increases.