August.22.12Personal Finance
Money Matters with Nimi

Most people are not as disciplined as they would like to be when it comes to saving and investing. They may save some money some months and nothing at all for several others. Yet for the vast majority of people, the only way to achieve your financial goals is by earning through hard work and saving and investing in a systematic and disciplined way over several years.

Cost averaging, is a simple approach to saving that helps you to save regularly whilst at the same time building long-term financial security. It involves investing a fixed amount on a regular basis rather than a lump sum, even when your finances are stretched, and no matter what the market is doing. This could be monthly, quarterly, or whatever suits you; you do not have to time the market or look for the best entry point, you just invest regularly.

It is almost impossible to time the market as it is challenging to anticipate correctly its peaks and troughs. For the average investor, and particularly for the smaller investor who does not have lump sums to invest, what is required is an investment strategy that allows you to maintain an even keel in rising, fluctuating and falling markets. Cost averaging accomplishes this and if you manage to apply this strategy to even a small amount of money, with ease and efficiency, you will have a better chance of achieving your goals.

Cost averaging is a particularly useful tool in a choppy market as it provides a buffer for volatility. Even though the value of your overall investments will fall as stock prices fall, remember that you also bought more shares at lower prices. As you will be drip-feeding your funds into the market at different times, you will be picking up investments at a range of prices; this reduces your overall average cost.

Pay yourself first

Determine how much you can afford to set aside each month? The amount you choose will depend on your own particular situation. This could be a fixed amount each month that will not change, or you might prefer to invest a percentage of your income, so that you invest more as your income increases; try to invest at least ten percent of your income for your financial future.

What are you saving towards?

One critical factor to saving is, knowing what you are saving towards. If you are saving without any clear purpose, you will eventually be tempted to dip into those savings to satisfy your wants. If you have no savings whatsoever and currently live from salary to salary, this is a good place to start. You need short-term savings so that you are better prepared to deal with unexpected expenses or emergencies. Start to build enough savings worth about six months of your routine expenses. You also need to be investing so that you can meet your medium to long-term goals such as educating your children or being able to secure a comfortable and fulfilling retirement for yourself.

Automate your savings

A most effective way to save is to put it on autopilot so that you don’t have to think about it. If you are in full time employment, your employer will already be withholding 7.5% of your salary and transferring it to your Retirement Savings Account (“RSA�) with your Pension Fund Administrator (“PFA�) on your behalf. This is probably the most popular form of investment automation. Because the money is removed at source you are less likely to miss it.

But, do not stop there. In addition to your RSA you may set up a direct debit from your current account each month and have it credited to an interest bearing account or an investment account, such as a mutual fund. There are money market accounts, mutual funds, and a variety of other investments that allow you to designate a specific amount on a regular basis. Nowadays brokerage firms and banks have made the process so simple that you can easily have your finances automated in a matter of minutes; and you only need to set it up once. You then determine how much you want debited each month and how frequently you want the withdrawals to occur. You can usually even specify the date on which the withdrawal should occur.

Automatically reinvest your dividends

You can also opt to automatically reinvest your investment profits or dividends. For example, when you sign on to a mutual fund account that makes periodic distributions, you are given the option to re-invest your dividends by acquiring more units in the fund before it enters your account. The fund manager is authorized to automatically take that money and use it to buy additional shares of the same fund instead of making it available for you to withdraw.

Whilst cost averaging can be a very effective way to systematically build your portfolio over time, it is important to realize that there is no guarantee of profit; neither does it prevent loss. Take a cursory look at your financial situation and assess whether you will be able to contribute to your investment account on a regular basis. If you are able to achieve this, remember that even though the objective is to automate your finances, you should continue to monitor your investments and make adjustments as required and as your financial situation evolves.

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