PERSONAL FINANCE: Planning your income

Studies have shown that the average worker can become a millionaire in his or her lifetime with sound financial planning but despite earning so much during their illustrious career people seldom achieve financial independence. This is not due to lack of income but the lack of knowledge to plan their finances.

WHY you should plan?

A good financial plan helps you and your family prepare for the unexpected, such as illness, loss of job, or even death.

HOW to be financially independent?

Planning your finances or income starts with assessing your financial situation up to determining your objectives and designing your financial plans to achieve them.

According to experts you can break your finances into seven key areas namely: Income, Savings, Retirement, and Tax, Expenses, Estate and investments. Note that each of these areas should have a target and a plan to achieve them.

To set yourself free from financial pressure and take control of your life, I suggest we put our income on a scale of 100% , where 10% of our income should go into tithes, 20% of our income should go into capital investments (i.e purchase of properties, land etc.) Those assets that are fixed assets should take 20% of our income.

The next 20% should go into floating assets: buying of stocks of blue chip companies where you get dividends or you trade on the shares when they appreciate. Other examples of floating assets are bonds, treasury bills etc.

The next 25% should go into Emergency cash: this is cash in your bank accounts. You should never touch it as this will reduce your blood pressure when the unexpected happens.

The last 25% should be on waste assets: these include clothes, transportation, feeding, shoes, cars, rent etc. this is the only part of your income to service yourself.

QUESTIONS to ponder on?

Assuming you earn 2 million naira a year, at the end of the year, do you have up to N500k in your emergency cash account? Do you have up to N400k in fixed asset such as land or did you invest up to that amount on your building project or do you have up to that amount worth of shares in blue chip companies?

If you do not have the aforementioned, then it means that you have spent the whole 2million naira per annum income on waste; buying cars, clothes, shoes, traveling abroad on vacation etc.

I am not saying you should not enjoy yourself but when you spend the whole or major part of your income servicing yourself, what happens to you and your family when you lose your job?

Hence my advice to some of us that spend all we earn is to build a comfort zone by putting most of our income in cash at bank, fixed assets and stocks.

In conclusion I will like you to know that it is imperative for us to dedicate time out in planning our financial destiny as this is a key to our financial independence. 

"If you know how to spend less than you get, you have the philosopher’s stone". Benjamin Franklin

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INVESTMENT: Investing strategies for any age

Irrespective of your age you can invest at any age with the right investing strategies.   

The Twenties
These are the early years when many people are relatively new to the workforce and are still renters. While some have formed a permanent relationship, many don't have children. Home ownership and family are still in the future.For this group the main financial focus is usually on savings or purchase of equtiesor shares. The first step for many in these age bracket will be to get their spending habits under control and then eliminate it. Only then will they be in a position to start building wealth rather than simply paying for past consumption.Their main challenge will be to decide whether or not to try to supercharge their savings growth by diverting funds into a regular savings plan which they must give a time horizon of at least five years, to give the investments time to perform.
The Thirties
By their 30s, most people are in a permanent relationship, many have children and most have bought a land or are building there house. Of course, some people in their 30s may not have any form of property or investment, this group may decide to try to catch up for lost time by aggressive investing, such as mutual funds or by taking out a margin loan to finance a portfolio of direct share investments.
The Forties
Your financial comfort in your 40s largely depends on how much spending restraint you showed during the previous decade. If you were reasonably disciplined, there is a good chance you will be able to build a house or, alternatively, buy a house in an upscale part of town. However, the 40s is sometimes a financially difficult time for people who have children since they are now costing more than ever, especially if they are at private schools. This group needs to budget carefully. In contrast, those with relatively high incomes, or with few or no family responsibilities, should have the capacity to continue to use gearing to expand their investment portfolio.The alternative will be to divert more money into there pension plan or life insurance.

The Fifties
This is a time for more sustained wealth creation due to higher salaries and fewer family costs (many children by now will be financially independent). For many people in their 50s the main financial challenge is to invest their savings to generate a retirement income, and maximize their age pension. In most cases investments are built around some form of allocated or complying pension. While there is a tendency for older investors to be extremely conservative, especially when the economic outlook is uncertain, higher life expectancy means a very defensive approach probably will result in your money running out.

Rules for us all
But whether you are in this, the fourth age of investing, or any of the other ages, all of us have to deal with the same economic and investment climate. We have to make the same range of crucial financial decisions, based on our assessment of the risks and opportunities that exist.
All investors need to guard against assuming the next five years will generate the same sort of returns as the last. "Expecting the second half of the decade to be just as good as the first half would be naive.”It may be, but there are plenty of reasons to think overall returns won't be as strong. One thing that won't change, however, is the need for most people to adopt a suitable investment strategy and then resist the temptation to chop and change when a particular investment sector generates disappointing returns. As already stressed, it is also crucial to avoid thinking you will be able to make big gains quickly. "Everyone wants to be rich tomorrow, but the risks aren't worth it. Impatience is our biggest barrier to serious and sustainable wealth creation." Stick with a strategy; while a few investors make a lot of money by timing markets, they are the exception. Instead, develop strict investment strategies and stick with them. "If you give yourself plenty of time and patiently stick with a well-designed investment strategy, you will almost certainly be a lot better off in 10 years time than those who don't.

“Your success in investing will depend in part on your character and guts, and in part on your ability to realize at the height of the ebullience and the depth of despair alike that this too shall pass.”John Bogle.

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