If you had only 500,000 Naira and you had to rank the following needs in the order of importance, how will you rank it?
- A Trip To Ghana
- Your Child’s School Fees
- Food And Water
Without batting your eye, you already know that the correct order is 3, 2, and then 1. This is because even though paying your child’s school fees is very important, you know that food and water must come first for your survival and that of your family before anything else.
As humans, we have a full truck of needs and wants. Yet, no matter how much we think we want a thing, there is an unspoken order of priority that guides our lives. One of the first people to put this order in theory is psychologist, Abraham Maslow in what we now call the “Maslow’s Hierarchy of Needs.”
He believed that every single individual has a hierarchy of needs that broadly cuts across a five-tier model comprising: physiological needs, safety needs, social/belongingness/love needs, esteem needs, and self-actualization needs. This is usually depicted in hierarchical levels on a pyramid starting from physiological needs and then to the self-actualization needs.
The idea is that the needs at the bottom of the pyramid must be satisfied. Higher needs on this hierarchy will only begin to emerge when we as humans believe we have sufficiently satisfied our important needs. In other words, it is only when you have eaten that you can decide whether you want to travel or not.
This theory guides different aspects of our lives as humans and investment is one of them. Just the same way we prioritize our personal needs, our investment needs and investment goals should be prioritized as well over others based on the stage of life we find ourselves.
At the bottom of this pyramid is first your basic funds to meet day to day needs, the next are investments tied to your health, followed by investments tied to your short term investment goals, followed by your medium-term goals, and ultimately your long term goals. Here is a rundown of how these investment goals are tied to your investment needs.
Basic Financial Needs
When it comes to drafting your investment goals, you cannot jump the gun. Just the same way you have to be able to eat before you can shop for a new phone or travel for a vacation, you must be able to meet your basic financial needs before you can invest in a house or towards your retirement.
This involves being able to meet daily financial obligations and even short term contingencies like the need to subscribe for data, transportation costs, paying for home maintenance, electricity bills, paying of pressing debts, and more. As a result, these funds should be cash or at least funds that can easily be obtained say from an ATM.
When you are budgeting your monthly salary, this portion usually takes the bulk of your money because it has to do with things like transport, feeding, and all other things that meet your immediate needs.
In investment terms, if your investment goals are tied to being able to meet these needs, then there is a need to invest in safe investment securities from a simple savings account or just having cash in your wallet. These investment goals should have as little risk as possible.
Health, they say, is wealth. Hence, the next item on your list on investment goals are investments tied to your health security. Accidents can happen at any time and sicknesses could come when you least expect them. So, right after basic financial needs have been satisfied, there is a need to ensure that you and your family members are in good health. This is where having a good life and medical in place should be in place before all other things. While many people simply wait until the disaster occurs or the illnesses come before canvassing for money to fix the said challenge, the truth is that out of pocket health expenses could eat up all your savings or hard-earned funds.
It might also force you into borrowing more than you can afford. Also, even though nobody likes to think about death, it is a real occurrence that you want to prepare for so as not to have your dependents desperate if such a fatality does occur. With the rising health costs born out of inflation amongst other things, there is absolutely nothing safer than investing in a good health insurance plan. A good health insurance plan should, thus, be the next item on your list of investment goals as there is very little you can do if your health is in a bad shape. It is also great to invest in a good emergency or contingency fund.
Short Term Investment Goals
Next on the list are your short term investment goals. A short-term goal is one that you want to meet in the nearest future. These are those goals that you want to be able to meet within a short period of time from just a couple of months to 24 months (two years). For example, if you would like to change your phone, plan for your birthday that’s coming up, or any other lifestyle change that doesn’t cost too much, the kind of investments you should make are those that allow you access the said funds when you need it without any hassle. As a result of the time requirement, these investments should have very minimal risk and be easy to liquidate. Savings in the bank, mutual funds in the money market, investments in treasury bills, and so on, are just some of the investments that will help you achieve these short term investment goals.
Medium-Term Investment Goals
Medium-term goals are classified as goals that are over three years to say ten years. These investments are goals that you set to be achieved somewhere between your short-term sustenance-based investment goals as well as your long-term goals. While short terms goals and other investment goals below the pyramid are relatively safe and tied to the preservation of investment capital, medium-term goals typically look for a safe balance between risk and return. They are also known to be a lot more conservative than long term investments. These needs could be met by some equity investments, bonds that have their maturity dates between three to ten years, and so on. In terms of stocks, you can invest in stable stocks that pay dividends. Asides investing in markets, they could be tied to things like securing simple mortgages, starting small sustainable businesses and so on.
Long Term Investment Goals
Last on the hierarchy are your long term goals that are over ten years. These investment goals are usually tied to building up your future. This is where you can invest in volatile stocks because you know that over the long term, things will even out. Long term goals are also goals tied to retirement planning, closing huge mortgages, real estate investments, and more. They typically require a disciplined saving and investing strategy because it means you get rid of all the temptations that come with leaving your funds invested for a long time.
The reason this comes last is that you cannot successfully plan for retirement if you have not successfully taken care of your basic financial and health needs. You cannot think of the kind of house you will want to retire in until you have successfully taken care of the house you are living in now. Long term goals allow you to fully exploit the full power of compounding as your money gets to work for you for as long as you let it.
One way to look at this hierarchy of investment goals is in terms of risk. In the short term, you can take very little risk because you need to stay afloat. However, when investing in the long term, because you have the additional factor of time involved, you have the opportunity to take risks based on your individual risk appetite.
Age is also important. A young person of 20 years can afford to make long term investments or even take on speculative investments knowing that he or she can make the money back in good time. This option is not available to someone who is 60 years old as capital preservation will be the retirement plan in place.
It is important to note that this is merely a framework that guides how we invest. It provides a simple system of allocating savings as the first steps need to be crossed before going to further steps.
This is the only way to be successful with your investment goals and stay on course with your strategies and plans until the very end.
Determine what stage of life you are in and select an investment plan that caters to your needs from the wide range of innovative investment products available and you will certainly be on your way to financial freedom.