There’s a piece of wisdom that goes around in the personal finance circles. It’s been reiterated so many times it starts to sound like a legend. Have you ever heard or read something about getting a free investment or using the investment to buy what you want while still keeping your money? Essentially having your cake and eating it? Well, it is possible if you understand the principle and know how to apply it. I will use some anecdotal examples to illustrate how many are doing this right before our very eyes and how to employ the same thinking in practice.
The first time I encountered this idea in a fully explained manner was while reading a Robert Kiyosaki book. Unfortunately, I cannot say for sure which one but he spoke of his love for luxury items and went on to state when he finds a new luxury item of his desire he does not buy it straight away but instead aligns it with an investment. He invests the purchase amount of the luxury item and then uses the proceeds of the investment to purchase the luxury item.
I’d like to illustrate this with a practical example. We are all familiar with stokvels, similar to mukando but they employ crowdfunding for grocery purchases and in this particular example the members pool the money for Christmas grocery shopping. Each of the 8 members contributes US$50 per month, meaning by the end of the year each person has contributed US$600 which is a decent amount to boost Christmas food shopping. Now if we instead of joining this mukando chose to invest our money in the ZSE for example. Buying shares at the beginning of each month. In 2020, 30 of the 51 active counters that completed the year having doubled the initial investment in them. Now of course our contributions are staggered but given the performance of most counters, it is reasonable to expect returns that are been equal to the invested amount. Our hypothetical person would have US$1200 (less costs) available. They could easily withdraw the initial US$600 they invested over the 12 months and remain with an asset (investment) worth US$600. Just like that!
Of course, there are a few things we need to be aware of to make this completely make sense. Firstly with investments like the stock exchange, your money is at risk and there is a real possibility of losing some or all of your money. Life goes on if you lose money you were saving up to buy a new phone but not so much if you lose your rent money. Robert Kiyosaki clearly talks about buying luxury items with this method and this is how we should approach it because money is at risk.
Grow your investments
Many people cite lack of adequate income to invest as one of the reasons, if not the reason, that they do not invest. But clearly, we see from the example above which was drawn from real-life experience that the limitation is more likely psychological than financial. If we took the two stories as being two different people the stokvel user would’ve “invested” US$600 just as the stock market investor. However, the results show that the stock market investor reaps double the benefits and can remain with a free investment.
Zero is a number
I quote the words of my A-level maths teacher Mr Jimu – zero is a number because they remind us of something very important. By now many of you have thought that you do not have access to investments that can double your money in a year. I’ll give you that. But even if we adjusted the returns on scenario B (using the stock market) to 50% and used the same method we would have US$300 remaining after withdrawing the initial investment. Cut it to 25% and you’d have US$150 remaining. Cut it to 10% and you’d have US$60. Maybe not sound like much but for someone who contributed US$50 a month it is. “Zero is a number gentleman (all-boys school), if you have anything above zero you have achieved something”. Mr Jimu would say.