How to Build your Savings / Investment Portfolio
Conventionally the term “saving” is used for the money you keep in a bank for short-term needs, where it stays passively stored and “investment” is more of an active action that you take to pursue your long-term financial goals. Our research suggests that in Egypt, people like to keep their money either in a bank account or real estate.
Where to begin?
To begin any journey, it’s important to know where you want to reach before you begin charting the roadmap to reach there and finally a determination to reach your destination albeit with some help. Of course, life is dynamic, and you may not see the whole path at the beginning. But it’s important to have broad idea of the general direction you wish to walk towards.
Everybody has a unique financial life; how much they earn, their current expenses, their likely future expenses, their financial goals are unique to individuals and families. But there are some basic guiding rules that are universal – having a buffer for the unexpected, different pots for different needs & horizons and the need to optimize the risk-adjusted return on money.
Where is your money going?
We know where our money comes from – for many of us there’s only one source which is our job – this makes it rather simple. But a lot of us have only a fuzzy idea of where our spend is – all we know is that we start the month with some money, and by the end of the month it’s substantially depleted! After all, spends have umpteen branches unlike income.
Our non-discretionary expenditure include food, shelter, education, and such areas where we have no alternative but to spend; there is limited or no short-term fluctuation in these spends.
But a significant part of our spend is discretionary: clothes, eating out, entertainment and such areas where we have an option (believe it or not) to spend or not.
A good starting point is to chart out your monthly expenses and know which are essential and which offer you discretion or choice. This is a good starting point towards your journey to building a robust financial life.
Where is your money resting?
A Bank: While you are waiting to save enough to buy that dream home or go on that exciting holiday, you may choose to put your money in a bank. It’s recommended that you exert some efforts on optimizing the interest you earn on your money by judiciously choosing your account type and thoroughly examine the various fee structures.
Real Estate: You may have invested in a housing project which you hope to sell in future at a profit. The returns on Real estate projects are highly dependent on the area and it is advised to explore various options instead of just relying on sales pitch by builders.
What is the 6-months rule?
A critical step towards a robust financial life is to have enough money to take care of life’s uncertainties – unexpected health expenses, sudden loss of income et al.
It’s important to build a liquidity cushion to tide over these uncertainties without losing your bearing. A good rule of thumb is to keep 6-months of your regular expenses as liquid savings – money you can withdraw anytime you need.
What should I do for big purchases?
Additionally, any big purchase such as a house, a car, a vacation, requires some pre-saving. This money could also be kept in a liquid form so that you could pay when you find the right choice.
You’d like to shop around among banks to get the best return on your liquid savings. You may explore other other avenues, like money market funds, that are almost as safe your bank, while earning twice the return.
You may consider keeping 1-month living expenses in a bank account, and the remainder 5-months in a money market account.
What should I do for long term investments?
Egypt is gradually evolving in its scope for long term investment. Currently, the most popular options are CDs or real estate.
Shop around to get the best possible return on your Bank CDs.
Real estate returns, in general, have been good over the past many years. But there are substantial costs of finding the right property and owning plus maintaining it. In this sector, we cannot rule out the luck-factor, especially in new localities – a new area, a new compound may catch life and become a meaningful investment over long term while other may not, for no apparent reason.
There is also friction associate with low liquidity in real estate. Keep in mind those potential downturns, when the property price may look good on paper, but selling the property at a good price may prove a tough nut to crack.
Stock market is relatively small in Egypt, although it’s growing gradually and is bound to catch up with the other major economies.
Over the long term, equities have been known to give better returns than other avenues. It may be a good idea to build a gradually increasing exposure to stocks. For new investors, mutual funds are a more appropriate way to invest than individual stock picking.