Building a nest egg
Understanding the fundamentals of savings and investing is critical to us all, and moreso for a single mom to help her achieve her family’s goals and dreams. Being proactive by educating herself in financial principles, will allow her to see beyond the tip of the iceberg of money matters. This knowledge will empower her to actively manage her money to benefit as 2 Corinthians 9:6 states, “ The point is this: whoever sows sparingly will also reap sparingly, and whoever sows bountifully[a] will also reap bountifully.” Some of the following key concepts will ensure her a successful harvest. “Don’t put all your eggs in one basket” is a key principle for building your nest egg and is known in Finance 101 as ‘portfolio diversification’. Basically, this means that single moms should include different types of financial instruments (asset classes), from multiple providers in their portfolios. Fundamentally, when considering in what to save or invest, single moms should also ask themselves:
· Why am I saving this money? Identify the objective or SMART goal for your investment e.g., purchase their home, travel, fund their children’s education. This will help determine how much money needs to be saved or invested over time.
· How long do I plan to save or invest this money? Is it to be used in less than year (short term), 2–4 years (medium term) or 5 years and over (long term)? Saving products are more of a short/medium-term nature, with accessibility/liquidity and safety being the priority. The main options include bank accounts and credit union shares or deposit accounts. Investment products are more long term, focusing on growth, with higher interest rates but more volatility.
· What is my risk tolerance/profile and what is the risk attached to the product, in which I plan to invest? Protecting her funds is a critical consideration for a single mom, as risk is the probability of her initial investment decreasing in value or her losing it.
a. A single mom needs to know her risk profile, as it guides her investment choice. Are you an aggressive investor, willing to accept high levels of risk, moderate or conservative in nature?
b. Does the product you plan to invest in have any insurance protection or guaranteed balances? Or is it unprotected and based on market conditions mainly?
c. Do you know that risk is related to reward? The higher the level of risk associated with a product, the higher is the possible interest rate you will earn. The impact of rising inflation eroding the value of their money, however, is important to conservative single moms having to accept some level of risk in their plan.
Based on this, eggs and baskets for the single mom may include a diversified portfolio made up of:
· Cash and Cash Equivalents -Savings in bank accounts, certificates of deposit (fixed deposits) credit union shares and deposit accounts. These are mostly short term, easily accessible, with some degree of protection. Relatively lower interest rates. Foreign currency funds also.
· Fixed Income Investments- Funds invested in bonds which are long term in nature but with a fixed face value. (Initial investment amount stays the same). Another option is the cash surrender value of your insurance policy.
· Equity-based Investments- Investments like shares gives you direct ownership in a company or indirect ownership like mutual funds or Unit Trust. Income and Growth type mutual funds are mostly long term, with values that can fluctuate over time. Money market type mutual funds have more steady principal values. These investments do not have insurance protection but can possibly help with the inflation issue due to their relatively higher interest rates.
· Real estate- A strong investment with possible increases in value over time. Not easily converted into cash if funds are needed quickly.
· Insurance (with savings) and Annuities- Long term, protected investment values suitable for retirement and healthcare issues.
Many single moms may wonder how much to place in each type of asset class. A recommended approach includes building your knowledge base, and then customising your portfolio based on your age, number of children, goals, time frame, current assets/ liabilities, and budget. Seek guidance from a qualified advisor, if necessary.
–Camille Ramdial, MBA (Master’s degree in business administration), MFA (Master Financial Advisor) Governing Director- Camilleon Consulting Ltd Facilitator with the Central Bank’s National Financial Literacy Programme (15 years)