With all the on-goings in the socioeconomic and political environments, it is time to ensure that our financial foundations are intact, and we have the basics firmly in place. This means we should take another look at our financial intelligence, financial planning, and wealth building skills.
A financially intelligent person understands the workings of money–debt management, compound interest, opportunity cost, time value of money and other important money concepts. She understands financial planning – budgeting, income planning, dependents planning, retirement planning, estate planning and financial risks management/ wealth protection. She also understands investments –return on investments, risk-return trade off, portfolio management and other investment basics. However, like everything else in life, money is changing, investment vehicles are evolving. Therefore, we need to be sure that we are up to date with the latest events and trends as they present opportunities or threats that impact our wealth.
In managing our money, we must understand compound interest and how it can build us up when we have fixed deposits or pull us down when we are borrowing. We should understand that one naira today is less than one naira next month simply due to the passage of time, not to talk of eroding factors like inflation and currency devaluation. We must understand opportunity cost – putting money to one use, means it is not available for other uses. Every opportunity has a cost we must ensure we are disbursing our funds into the most efficient, prudent and profitable uses at all times. Current trends in money include online financial transactions, digital currencies, and borderless payments. We must master how to take advantage of the new and the old to improve our monetary transactions. However, we must be keenly aware of the threats involved, for instance, identity thefts, account hacking, unsafe internet connections, and apply effective risks management strategies to eliminate or minimise the threats.
Financial planning is a key aspect of wealth management. It starts with our monthly spending budget. This budget is what lets us know how much disposable income we have for investment purposes. A good budget will accurately consider all our financial obligations and determine how much money is left over. However, it would also show us where savings can be made to create additional investible funds. A current trend in financial planning are mobile apps, which we can easily download from our phone’s store. These professionally designed financial planners are invaluable in helping us to create financial plans and guiding us in sticking to the plans. The benefits of personal financial plans include, identifying and blocking sources of financial leakages, discouraging unplanned, impulsive frivolous spending, channeling adequate finances to causes that matter to us, preparing for a future when one can no longer work and earn money, generating pools of money for investment, reducing money-based relationship friction, and reducing the financial impact of life’s emergencies. Financial planning covers every aspect of our lives – children’s education, health management, retirement planning, estate planning (writing our wills) and of course wealth protection and hedging strategies. Anyone who truly understands the time value of money would realise that it is never too earlier for retirement or children’s tertiary education plans. Risks management either by portfolio allocation methods or by transferring the risks to an insurance underwriter are critical aspects of financial planning and they should be properly incorporated into our wealth management strategies.
In managing our investments, we must ensure we are holding the best portfolio that suits our age, risk appetite, ethics, yield expectations and cash needs. That is why portfolio allocation is acutely personal to the investor, because we all have varying peculiarities, which our portfolios must reflect. However, we should all practice effective portfolio diversification; reducing investment risks by investing in different asset classes (money market, public equities, real estate) and then within each asset class, investing in at least two assets (as soon as we can afford the second one). This implies that all our equities should not be limited to bank shares alone. Yet, we must not spread ourselves too thin, such that each investment is miniscule – we should find a healthy balance. Current trends in investing include peer-to-peer lending, crowding funding, currency trading, financial and commodity derivatives, etc. These all promises higher investment returns in these times of economic slowdown. Our mantra here should be “caveat emptor – buyer beware”. Let us proceed with caution and the utmost due diligence, taking time to choose only safe assets managed by time tested, transparent asset managers.
This week, we have gone back to basics to ensure that the foundations we our building are wealth on are strong and durable. Happy investing.