Did you enjoy the last #FeatureFriday? Our guest showed us healthy meal options on a budget! In case you missed it, check it out here.
Today, I am honoured to have the awesome Sisi On A Budget (fellow Sisi) featuring on the blog.
Amina lives in Lagos. She works in mid-management in a well-known bank and earns a decent salary. Like most 20-something year old, singles living and working in Lagos, she tries to maintain “The Fleek”.
- She drives a nice car. Nothing fancy, can’t be chasing suitors away.
- She lives in a nice flat in Lekki Phase 1. No flatmates though. She loves having her own space for the first time in her adult life.
- Hair done, nails done, everything did!
- Wardrobe of life and destiny. She likes to “Buy Nigerian” so those designers hold her mumu button.
- She’s always up for a night out with the girls every other Friday. Swank restaurant, dolled up to the nines…the works.
By the end of the month, her bank account is crying out for help because…when is payday again???
I’m sure no one can say they enjoy being anxious so we’re going to spend some time going over the basics for building a solid financial plan to make your life work seamlessly.
The importance of Financial Planning cannot be over-stressed. Even if you are of the opinion that tomorrow will take care of itself, there are other ways in which Financial Planning will make your life better today.
- Managing your income better: Using a budget as a planning tool and tracking your spending will open your eyes up to the areas where you waste money. By identifying these areas and trimming them, you free up more cash for spending, saving and investing.
- Regardless of the perception of living standards around you, cutting back on frivolous spending will help you on your path to building the life you want. What if Amina scales back the night outs to once a month and starts a supper club with her friends? They spend less on going out and can put the cash towards an inverter to ensure the fridge/freezer is powered all day long. The knock on effect is that she can plan to buy in bulk (which is probably cheaper) knowing she has the capacity to store the items. Hashtag Winning.
- Speaking of saving and investing, notice how Amina has nothing going on in this regard? Given the current economic outlook, job security is a real concern. Life is full of uncertainty. Wouldn’t it be great, if you had a nice cushion to cover any eventuality? Freeing up cash by trimming the waste can provide the capital needed to create income generating assets that will provide some security against uncertainty.
Budgeting is a game of balance. It is important to remember that the point of the exercise is to create a comfortable life not a life of deprivation.
How can I make this work for me?
The first step to implementing a plan that will work is setting intentions.
Intention [in-ten-shuh n] noun
- an act or instance of determining mentally upon some action or result.
- the end or object intended; purpose.
- purpose or attitude toward the effect of one’s actions or conduct.
Culled from Dictionary.com
I’ve shared in the past a Life Hacker post about finding a purpose for your money. It’s a universal truth, and something I’ve come to learn in the past year, that your intentions guide your actions, determine the direction in which you are headed, and the results you achieve in the end.
I would like you to take a few minutes to think through your life goals. These are not financial goals. It could be anything from starting a family to career choices. Don’t forget to include leisure activities! Are there any budding travel bugs reading?
Figuring out the direction you want your life to move in will determine your overall financial plan. By outlining the things you want, you can start to put a monetary value to it. Let’s take starting a family as an example.
You meet someone, get married, have babies and live happily ever after. Right?
There are costs associated with this progression. Weddings don’t come cheap. Let me rephrase, Nigerian weddings don’t come cheap! Then you have to decide:
- where you want to live
- the sort of house you want to live in
- how many children you will have
- what schools they will go to
- where you will holiday in the summer months
And that’s just scratching the surface!
Make sure that the goals you set are realistic and remember to put a date on it. It’s important to figure out the timing of your plans as it subconsciously creates urgency. It will also save you from falling into a procrastination trap.
I would recommend using the process described in the #PlanYourBestYearYet Workshop to figure this part out.
Next, you will need to take stock of where you are right now in terms of your finances. To evaluate your current financial position, you will list:
- your sources of income: how much does each source bring in? Guesstimate if it is irregular.
- Your expenses: how much do you spend and on what?
- Your assets: What you own.
- Your liabilities: What you owe.
Your net worth (wealth) is the value of what you own minus what you owe. More savings and investments mean more assets which leads to an increase in your net worth. Another way to bump this number up is to reduce the other side of the equation i.e. liabilities.
Now that we know where we are right now and where we are going, it is time to decide how we’re going to get to our end goal.
There are five key areas to consider:
- Managing cash
- Financing large purchases
- Retirement planning
Creating a budget is all about predicting your earning potential and spending patterns in the period under consideration.
You will want to estimate your expenses on a monthly basis and then fit in any one-off expenses or large purchases. This will be heavily influenced by your income in the same period.
A few weeks ago, I ran a poll on twitter asking people what bank accounts they maintained. I had interesting conversations as a result ranging from “my account is just a place to hold cash” to a very sophisticated system of maximising returns on cash that would otherwise have been sitting idle.
Managing cash or liquidity is a process of ensuring you have enough cash to cover your daily expenses and a little extra for emergencies. You can allocate your Emergency Fund to short term (less than 1 year) investments to enhance its value. In this case, you might consider: Fixed Deposit accounts, Money Market Accounts and Call accounts.
Financing Large Purchases.
There are two main options available to you here: delayed gratification and borrowing.
If you choose to go through the delayed gratification route, you will need to determine how much you need to set aside periodically to make the purchase within your desired timeframe. This will go in your budget as a reminder to actually move the funds. You can combine this with what we have learned about liquidity management to earn interest on the money while you save.
Taking out loans is not as commonplace in Nigeria as elsewhere in the world because of the high risk lenders associate with consumer borrowing. If you choose to follow this path, these are some things you ought to consider:
- How much you can afford to borrow
- Maturity of the loan (how long do you have to repay it)
- Interest rates: make sure to have the lender explain in as simple terms as possible until you can fully appreciate the interest implications of the facility. If you don’t understand it, DON’T SIGN THE FORMS!
Other sources to consider are:
- Your company’s cooperative society – they usually lend to members at below market rate and are regulated by the government
- Informal saving clubs aka Ajo
Once you have your liquidity management plan in place, any excess funds should be allocated to investments. The primary objective of investment is to earn the highest return possible. You must bear in mind though that there is a risk trade off. The higher the return, the more risk you will have to assume.
The options for investing include: Stocks, Treasury Bills, Mutual Funds/Exchange Traded Funds (ETFs), Real Estate, and Starting a Business.
This is one area that a lot of young people neglect in making a financial plan. It’s a statutory requirement for companies to set up Retirement Savings Accounts (RSAs) for their employees. This is a useful primer on how they work.
The main concern here is whether this is sufficient to fund your retirement.
A few things to consider in making an assessment of your retirement needs are:
- Living expenses in retirement – this will be determined by lifestyle choices. Quiet retirement or living it up?
- Healthcare costs – there are a number of health issues that are associated with old age. Do you have a plan for covering the associated costs?
- Investments vehicles – it is important to pick investments that will earn a high enough return while preserving your capital. The type of investments will typically change as you get closer to retirement because the objective of your portfolio will change over time from earning high returns to paying out regular income.
- Will you have dependents when you retire? Will you have enough saved up to cover their costs?
- Emergency funds – Uncertainty is a fact of life so you will have to maintain an Emergency Fund even in retirement.
When you are done creating the ultimate financial life plan, it is important to put systems in place to automate the different parts. This is the only way to ensure you stick with it in the long run.
The entire point of being thealaroro is to have the best grip on my finances. Create Value. Earn. Save. Spend. Give. Create Value. Earn… it is a continuous cycle.
A day before my birthday, I had a very insightful session in preparation for 2016 with her called “Plan Your Best Yeat”. She has packaged all the necessary resources for you to have a(n) *insert your best word* 2016 here, all for free! Isn’t she amaaazing?!
Thank you very much, Sisi on A Budget for sharing with us. We appreciate you and we wish you an awesome 2016!
No Excuses 2016! We are going to have our best year yet, yes or no?