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Despite earning over N25 million in a lifetime the average professional is usually under financial pressure and seldom achieves financial independence. This is not due to lack of income but the lack of knowledge and resolve to plan their finances.
Financial planning starts with assessing your financial situation, and goes on to determining your objectives and formulating financial plans to achieve them. How to be financially independent Eric Ighalo, Country Director, Ighalo and Partners, says financial planning requires skills which an individual must learn in order to get a grip on his finances and achieve his desired financial future. According to Ighalo, for effective financial planning, you can break your financial concerns into seven key areas. These are Income, Savings, Retirement, Tax, Expenses, Estate, and Investment. Each of these areas should have a target and a plan to achieve it. Financial plans should also cover net worth, risk management, insurance and asset management. Austin Nweze of the Lagos Business School says the starting point is to find out where you are, that is, your current financial status. Ayegbusi Olubukola, a personal financial consultant with Standard Chartered Bank, agrees and believes it is a very important question to answer when setting out to plan your finances. It is also important that you understand the basics of income management and preservation, which will aid your planning. According to financial planners, most people do not see the need to plan or are too blinded by their achievements, which they believe is enough to see them through all situations. Why plan Neme was a "successful" middle-aged businessman whose business did well. He lived quite comfortably and took good care of his family until calamity struck. He was diagnosed with a terminal illness which cost the family's fortune to get him out of the hospital, whilst his business collapsed whilst he was sick. He got better but had nothing to fall back on and what he had had been spent on hospital bills and his family expenses. Neme did not have any investments anywhere nor did he have any financial plan in preparation for such an emergency. A good financial plan helps you and your family prepare for the unexpected, such as illness, change in circumstances or even death. When you plan you often find it necessary to invest, which adds value to the economy. Tips to sound planning To set yourself free from financial pressure and take control of your life, Ighalo and others say you must start to plan your finances by taking the following steps: What is your current position? You should start by assessing your net worth. Write out a list of your assets - house, car, land, stocks and shares, jewellery, etc. - and their value. Write a list of all your liabilities - loans, mortgages, etc. and the amount. The difference is your net worth. This is akin to a company balance sheet. You should also list your income sources (such as your job, investment income, etc.) and your expenses. Start with regular expenses that are easy to remember and then go to the ad hoc ones. You could also start with the biggest ones and work your way down. The difference between your income and expenses is your net income and the amount that is available for you to save and invest. You must also list out expected or planned expenses for the future, such as your own house, your children's schools fees, etc. You must set goals in a number of areas. (i) Income/Net income. Set a goal for your income and, more importantly, the difference between your income and expenses. That is how much you have to invest. If your current net income is low or negative it is important that you set your goal to try to increase it. With regard to your income, many people find that they are successful at growing their income when they set goals which are up to 50% of their current income. Ighalo believes you can increase your net worth if you reduce expenses and invest more. (ii) Retirement. How much income do you require for retirement? At what age do you want to retire? (Calculate the number of years you have left before retirement.) (iii) Savings and investment. In addition to saving for your retirement you need to have two types of savings. One is for an emergency; a rule of thumb is three to six months’ worth of expenses, and the second is for any projects or future expenses like buying a new car. (iv) Insurance goals. How much would your family need to replace your income if you died or had to stop work due to a serious illness or accident. (v) Inheritance goals. How much would you like to leave to your spouse and children if you pass away before them? Make a plan. Once you have developed your goals, you need a plan for each goal. (a) Income. Many people ask for a raise or promotion (after making themselves more valuable by developing their skills and taking on more responsibility), some look at second income sources while others look to improve the returns on their investments. (b) Net income. To achieve their objectives in this area most people reduce their expenses. Three techniques that have proven very successful are: (i) Budget. Learn to draw and keep to a budget. How do you know where your money is going if you don't budget? Budgeting helps you allocate certain amount from your income to specific needs. With it you can account for your money and develop the discipline to spend on what you plan, rather than respond to pressing demands for money. (ii) Pay yourself first. After setting your budget and your net income figure, at the beginning of each month you write a cheque to your savings account or stockbroker for the amount of your net income. This makes sure the money is not drained away by other none budgeted priorities. (iii) Keep records. Be accountable to yourself. Keep a general record of how you spend money. It will help you monitor your progress. From time to time stop and do an appraisal of your goals. Note where you are doing well and also observe where you are not. If need be try other ways that can help achieve the same results. There is nothing wrong in changing a plan if it is not delivering the desired results. (c) Savings plan. You can decide on what works best for you, but professionals advice that you keep aside at least 10 per cent of your monthly income for savings or better still in vestments (of course this needs to be equal or less than your net income). Nweze suggests that if you are older, say between 40 and 60, you should set aside more because at that age you are nearer retirement and 10 per cent may not grow large enough before you retire. (d) Retirement plan. Having set an objective for the amount of money you need to retire, you need to decide how to achieve it. You could go for stocks and shares, for real estate or a combination of bonds and savings account. If your retirement is over 10 years from now, most professionals advise real estate or stocks because they tend to provide a higher return. For instance, if you begin at 25 to set aside 10 per cent of your income, which is say N100, 000, that will give you an average of N10, 000 per month and N120, 000 a year. Assuming a return of 20 per cent per annum over 35 years your savings would have increased to N620 million at age 60. However, if you began to save say at 40 you would only have saved N31 million. When investing, diversification is an important strategy; investing in just one stock exposes you to a significant risk of loss. We have an article on diversification in this issue. (e) Invest. You may have a savings and/or a retirement plan but you should also have an investment plan. Look out for profitable investments and make the best of them. You can enlist the help of a stockbroker to help you in this area. Investment options include buying of shares, life insurance, treasury bills and bonds. (f) Have an estate plan. Estate planning to many people means a will. This is of course vitally important. If you do not have one the government will decide how your estate is treated, or worse, it will create conflict in your family. In addition to a will it is important that you get advice on setting up a trust. The benefit is that it will reduce the amount of death taxes your family will have to pay, and it will shield your assets from the probate process, which in many states in Nigeria can take up to two years, before which your beneficiaries will not be able to access your assets. In addition, trusts also offer your assets some protection whilst you are still alive. (g) Have an emergency fund. Emergencies will arise at certain times in life. You should be well prepared for these ahead of time. You can do this by having an account or an investment whose returns will serve this purpose. In all, Ighalo cautions: "Watch out for those habits that can hinder the success of your financial plan. To do this, you must know where your money goes, know the values that drive your money and the options available to you in increasing your net worth. Then, develop a simple lifestyle." "You should also differentiate your needs from your wants. Needs you can't do without but wants you can delay or completely ignore," Nweze adds. Keep to these steps and you are on your way to a secure financial future. In the words of Haliburton, "No man is rich whose expenditures exceed his means; and no man is poor whose incomings exceed his out goings." |
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