James over the course of his working life has invested quite aggressively in land in various parts of the country. James grew up knowing and believing investment in land was the way to go. After all, he is now sitting on assets worth millions and (in terms of value) has recovered his initial costs of buying the land many times over. Many of us would like to be James with acres and acres of land wouldn’t we? James has accumulated assets but there is one thing he did not take into consideration all those years when investing and that is the need for investments to generate income. He has land, but he did not turn that land into something that will generate a passive income for him. Unless he sells some if his land, he is still dependent on his job for income to survive.
In the quest for investments we often overlook this very important aspect. Investments give you returns in two forms. First is Capital Gains i.e. the market value of your investment rises over and above what you paid for it. The second is Income. With Capital Gains, you actually have to sell the asset to realise this gain. With Income, you do not have to sell the asset to realise the gain. With Income your return is not one off but can continue into perpetuity. You can choose to call it Financial Freedom, Retirement, Financial Security etc but to achieve this, you will need what is called Replacement Income. This is the income that your investments need to generate that can cover your lifestyle expenses. Whether you go to work or not that month, or you fall sick for 6 months you will still be earning this income. In James’s situation should anything arise and he cannot work, he will have to sell some of his land. There is no guarantee that he will get a buyer or how long it would take. However if he had developed some of that land into flats and was renting them out, he could rely and use that income immediately.
Your asset could also be your business. Ask yourself how long your business can go on without you. If your business is dependent on you being there every day to generate income, then you need to start looking at putting in structures and systems so it can continue generating income in your absence.
You might wonder where you find these investments that can eventually sustain you. For starters don’t go start looking for an immediate one off solution that immediately covers all your expenses. It is a process and happens over time but start now. We often overlook investments because they may not confirm to traditional investment myths. It could be a one roomed studio apartment that you buy rather than the three bed roomed apartment in a high end area that was in your mind (and you were waiting to accumulate enough money to buy). It could be an adjustment to your services that brings in an extra Kes 5,000 per month – that money may cover your electricity bills!
Stay open minded and remember that capital gains have their place but your investments eventually need to result in generation of income for true Financial Security.
Waceke Nduati- Omanga
waceke@centonomy.com | www.centonomy.com| Twitter @centonomy.