How to invest wisely and avoid the debt trap

Inflation reduces your purchasing power every year.

You need to keep up with the rising cost of living.

The experience of other countries has shown that relying on your salary alone is not going to be enough.

Let’s use the following stylised example.

Let’s say you earn a salary of Sh10,000 and you deposit it into your bank account which earns you a measly four per cent return.

You know from paying for your household and other expenses that your cost of living is rising by far more than this.

Investing requires the discipline of going through a mental checklist to ensure that as best as possible one can avoid making mistakes, or is best equipped to deal with them if an adverse situation arises.

Mental checklist for investing

Just like pilots use a checklist before they start a flight, investors must also have a checklist before they invest money. Create your own, or use the following list.

Start early to take advantage of the compounding of capital.

You can even start with a small amount of money — investing is not just for the wealthy

Invest for the long-term. Don’t churn (frequently get in and out of investments) as you will needlessly create a tax issue for yourself and also pay high transaction costs and fees
Don’t borrow money to invest. If the investment falls in value, you still have to pay money back to your lender

Understand that you cannot earn high returns without taking on high risk.

Not all investments are suitable for everyone, so recognise the obvious and the hidden risks you are entering into

Be realistic — investments can go up and down in value.