The 25:50:25 money rule: A smarter way to invest your money

“When it comes to returns, it is all packed with your financial goals. You can have short-term , medium-term and long-term goals. All these depend on the performance of the investment vehicle that you are looking for,” says Dennis Gitahi, a business development manager at Jubilee Asset Management in Nairobi.

In other words, the idea of more returns has to be tied to your purpose. For instance, money meant for school fees bound in three months has no business being tied up in stocks or land, no matter how tempting the projected returns look.

“If your goals are short-term, you should not go for investment vehicles like equities or bonds. Investments like money market funds (MMF) have the purpose of short-term goals. For medium-term goals, we can look at treasury bonds, the 182-day or 365-day T-bills and for the long-term, you can consider equities and bonds,” he says.

Returns isn't profit

Returns, as Mr Gitahi further explains, should not be confused with profit margins.

“For profit margins, you have to buy something at a lower price and sell it at a higher price. Majorly, that’s what equities will give you. You buy at a lower price and get dividends but when you want to offset it, you can offset it at a higher price.”

But even with that,he cautions that with investment vehicles an investor should not look at the profits but rather the returns they get.

"Profit is only skewed to equities, but not profit passing.”

The timing factor

Interest rates, on the other hand, play a central role in defining what kind of return an investor should expect. But it’s not just in the rate; it’s also in the timing.

“Case in point, bonds at the primary market normally give you good rates; however, with time at the secondary market, an investor tends to get them at even higher rates,” Mr Gitahi says.

This applies equally to equities, where market sentiment dictates the price movement. The demand will influence what the price will be for the following months.

Consequently, macroeconomic decisions like those from the Monetary Policy Committee also influence what return you will get from your investment.

“They lowered the CBR (Central Bank Rate) rate to 9.75 percent, which has an overall effect on the treasury bills. For example, someone who bought the Treasury bills in January tends to have a higher return than anyone who is going to buy them after that time,” Mr Gitahi says.

But he adds, “You will continue with the percentage that you started with because they have a maturity period.”

Safe havens for investors

For risk-averse individuals who might get sleepless nights from watching the Nairobi Securities Exchange fluctuate, Mr Gitahi recommends safe and liquid short-term options.

“For short-term investments, you don’t tend to suffer in terms of risks because they are very secure. I’m referring to the treasury bill and MMF, which offer a safety net for you,” he says.

Liquidity here is the magic word.

“You can put in your money today, and then probably two weeks later you want your money back; you’ll as well get it plus the interest that you’ve accrued for the two weeks. MMF is more liquid than the 91-day Treasury Bill,” he says.

The liquidity of MMFs, he says comes from what they are made of: “It is the investment vehicles that we invest in—the 91-day Treasury Bill, call deposits with banks, and also an aspect of commercial papers.”

Playing the long game

For long term investors, Mr Gitahi recommends thinking beyond financial instruments.

“We can look at land and buildings. For example, you can buy a piece of land at a very low price, and then five or six years to come, the market changes and you find that you’re even going to make 10 times what you bought the land at.”

However, he issues a warning: “The problem with long-term investment vehicles is liquidity. For you to get someone who’s going to buy land, it takes time, and that's a tough spot to be in, given that sometimes there are catastrophic events which need immediate response.”

When it comes to traditional financial assets, he throws his weight behind bonds. “Bonds are very safe and secure; we have both the infrastructure bonds and the normal bonds. They guarantee your income because you get to receive income twice a year,” Mr Gitahi adds.

Planning for retirement

Pension planning is one thing Mr Gitahi doesn’t believe investors talk about enough, despite its importance.

“They help in ensuring that one, you retire with dignity, and also it ensures that you get consistent returns after retirement. The annuities are there to cushion you and ensure that even as you retire, you retire with dignity and are even able to afford the lifestyle that you used to have as you were working,” he explains.

And it is not just about self-preservation. “It ensures that you don’t get to ‘black tax’ your children,” he adds.

The 25:50:25 rule

Alfred Mathu, a seasoned financial advisor, further deepens this financial conversation with sentiments that risk and returns have a direct influence on each other.

"The higher the risk, the higher the potential return. Investors need to understand the risk exposure in the investment plan that they are getting into. They should assess their risk appetite before investing and also remember to diversify their scope of investment,” he says.
The recommends the 25:50:25 rule.

“The first 25 percent of your regular income should be for your savings and investments. This 25 percent is broken down into three elements: 20 percent goes to emergency funding, 50 percent of it goes to your medium-term investment, and the remaining 30 percent is meant for your retirement investment," Mr Mathu says.

The second ratio of 50 percent, the financial expert explains, should be directed to your personal and family needs. These are the compulsory expenses that you cannot do without.

The remaining 25 percent in the ratio, Mr Mathu says, "This last ratio is for your lifestyle expenses; these are things like, for example, if you want to buy a car, vacation parties, the monthly self-care expenses, tithe, among all the other complementary experiences. Your investment ratio should not be used for your lifestyle expenses."

For those just starting out in investment, Mr Gitahi urges a steady but intentional beginning: “Don't have funds in a bank account because that ensures that the money lies idle.”

On comparing land, bonds, and MMFs, Mr Mathu says, “Different instruments offer different returns, and there is a need to have clarity on the goal you want to achieve through each of these avenues. All options have their unique risks and advantages; none of these is better than the other. “Diversify your scope of investment,” he says.

When it comes to high-return investments, the financial expert believes the danger lies in the myths.

“Some think that a high yield is guaranteed; others think that you can alter the investment horizon without impacting the yield. The high-yield options are not 100 percent risky; some have their conservative elements. Always be guided by a qualified financial advisor in making investment decisions,” he warns.

As for those just starting out in investment, Mr Gitahi urges a steady but intentional beginning: “I would advise them not to have their funds in a bank account because having your funds in a bank account ensures that their money lies idle.” Instead, “Look for a short-term investment that is going to help you earn returns even as you plan for the future. For this case, I would advise them to first have their money in money market funds. Then they can now look at what other options there are for me to diversify.”

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