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Investment decisions: Doing more with our savings – Part 2

By Bolutife Oluwadele
27 January 2022   |   3:40 am
This is a policy taken on the life of a person known as a policy owner for an amount known as principal assured for a specified period to pay the sum assured to the policyholder at the expiration of the period or to the beneficiary...

Investment. Photo: IED

Life Policy
This is a policy taken on the life of a person known as a policy owner for an amount known as principal assured for a specified period to pay the sum assured to the policyholder at the expiration of the period or to the beneficiary in the event of the policyholder dying before the expiration. This usually entails making yearly payments known as premiums for the specified period in the policy. The premium payment can be monthly, quarterly, half yearly, or yearly.

The premium is a small amount paid over a long period. This is more or less compulsory savings and a guide against the future, especially in an environment where social securities are not paid.

Apart from the capital sum, the policyholder is entitled to a fixed percentage on his paid premiums calculated yearly. Thus, at the policy’s expiration, the actual amount received is more than the sum of premium paid during the policy.

Educational Endowment Policy
This is a policy specifically designed to take care of the child’s education in the future. Such policy intends to encourage the deliberate investment in the child’s education even before the need arises. It is also expected to take care of the critical years in education, especially at the tertiary level though sometimes it extends to the secondary level.

The system is relatively similar to a life policy, except it is meant explicitly for education. It is a gradual saving of the child’s education costs in the future today. Whatever premiums are paid too attracts dividends so that what is received at the policy’s expiration is more than the sum paid as premiums.

The beauty of these policies is that you are granted tax relief on the premiums paid under such policies. In this case, it relieves you of the tax burden.
Such policy can also be used as collateral to borrow from financial institutions.

Personal Pension Scheme
This is a type of scheme specifically designed for the self-employed in a recent development in our nation. That it is more attractive to self-employed makes it no less suitable for those in employment. The reason is that it offers further opportunities to plan for the future.

A personal pension scheme involves investing a certain percentage of one’s income with a fund manager. Usually, Insurance Companies collect the sum assured with accrued interest at age 45 or above or such arrangement to receive the amounts due in a period. The latter arrangement is usually known as an annuity.

This scheme is still in its infancy, but like other policies, the premiums paid under it attract tax relief usually computed based on the age of the policyholders.

The contributory pension scheme has further deepened this, as it allows individuals to make personal contributions in addition to the compulsory employer-employee contributions.

Property Investments
This is an investment in lands and buildings or what is commonly called real estate investments. Because of its size and form, this type of investment is usually capital intensive. In a situation where mortgage institutions are alive to their role, the burden of sourcing funds for such investments is shifted to them as they are expected to provide the necessary finances that are repaid over a long period. It could be argued that this is the most secured form of investment as land is known to always appreciate over some time.

Other Long-Term Investments
These include
Investment in cottage business and Transportation business.

Consideration For Investments
Having seen the windows of opportunities of investments discussed above, the next stage is to look at those factors that will influence our decisions on the type of investment to channel our resources; such will include the following.

Amount at our disposal:- The amount we have saved to a large extent influences the choice of investments we take.

Return On Investment (ROI):- A critical factor that influences our investment decision is the returns that are accrued from such investment. For instance, the higher returns from personal lending attract some people not minding the possibility of investment loss.

Security of investment:- Another major factor in investment decision-making is the security of investments that are available to us. In most cases, the well-secured investments are usually of low returns.

The economic class we belong to largely influences our investment decision. A high net-worth individual will prefer capital appreciation investments as a pensioner will prefer a high dividend investment.

In addition to the above, our knowledge of the available investment opportunities also influences our final analysis decisions.

Evaluating Investments
However, before investments decisions are taken, more so when we are faced with options, the evaluation of such options provides better decision-making.

Methods of Evaluating
Payback Period
This is the period it takes us to recoup our investment. It is usually calculated by estimating the annual cash flows from the commencement of a project to the end of its useful life.

Rate of Return Method
The rate of return used to be the primary method of investment appraisal as it measured the annual profit as a percentage of the capital invested.

In previous articles, I have explained some of these methods.

Do not just save your money; always ensure saved money is channeled towards investments. Savings not invested is, at best, a deferred consumption.

Concluded

Oluwadele, Ph.D., is a chartered accountant, author, and public policy scholar based in Canada. Email: bolutife.oluwadele@gmail.com