Welcome to another week of Financial learning. Last week, we analyzed the subject of security of our investment. We learned about the two main classes or avenues we could place our hard-earned monies at.
Today we will be looking at the third component, which is Liquidity. Liquidity in today’s discussion will hover around the ability to convert one’s investment into cash.
Investment as already explained in the Savings 101 is the use of money with the hope of getting more money. In other words, “pushing” your income or savings into a venture that has the potential of increasing it in simple language.
Investment is the use of money with the hope of getting more money
There are many types of investments which we would be discussing later on in our financial liberation journey. However, for the start, we need to ask ourselves the reason for investing!
The reason for investing when answered will now bring the next question of how long we may want to invest to get to this reason.
The duration for wanting to invest also affects the investment tool to choose. Am I speaking a lot of grammar now. Let’s make it practical.
Let’s assume Kofi, a fresh graduate from the University of Ghana gets employed at Guinness Ghana Limited earning a monthly salary. Kofi has a dream of settling down with his fiancée in approximately two years time.
KEY INDICATORS NEEDED FOR A SUCCESSFUL INVESTMENT
Kofi has established two key indicators needed for every successful investment.
First of all is the need to establish the purpose. His purpose clearly is to legitimize his relationship. An investment without a clear-cut purpose is just like starving yourself in the name of fasting without prayers!
The second valid indicator clearly stated by Kofi is the duration for this target. That is 2 years!
Every investment should have a definite lifespan known and planned from the beginning. Investing is not a gamble! It is a conscious effort targeted at a definite objective.
Now Kofi will need to ask himself some cogent questions. What investment instrument can he push my monthly income to such that, at the end of the period, he will be getting my principal and interest back without much stress.
This is when Liquidity comes in. Such an instance may call for Treasury bills or fixed deposits where Kofi can build up cash for each maturing period of say 90, 180 or 365 days. Kofi will know exactly when these investments would be maturing and will then plan his wedding towards that.
In the same vein, Kofi could use his monthly income to start retail buying and selling. It may be a good option if the right marketing skills are employed along with the right person for its operation. It may give Kofi a relatively higher profit than the Treasury bills or Fixed deposit. The risk factor, however, is that in business anything can happen!
Kofi can as well push his income into Forex trading be it micro or macro level. At the micro level, he can decide to be changing his income into foreign currency and trading with the market changes. The risk is once again very high but with good margins.
However, if Kofi within the period decides to also invest some income for emergencies, he will need to fix his eyes on how quickly he can get cash for this investment.
If he invests this emergency funds in the micro level forex business, he would be forced to sell his dollars at the wrong time, thereby losing a lot of money.
If he decides to invest his emergency money in a transport business, he would be forced to sell the vehicle at a relatively cheaper price for quick cash.
It is therefore very important that we carefully look at the purpose of the investment, how long or short we want to invest and then choose the appropriate tool.
A wrong tool can make investment bitter!!
Do not invest for a short period in investment tools that has long-term benefits like mortgages.
Liquidity is Key!