SOFT FINANCE WITH AYO AROWOLO
Questions have come from readers of this column in different formats, but they have all revolved around the issue of basic and useful personal finance tips that interested individuals can work into their money metrics, especially as the new year ticks off. In today’s edition, Prince Yemisi Shyllon, a knowledge-driven investor and Mrs Modupe Vincent, a personal finance coach, share some tips for application. Please enjoy…
- SAVE FROM ACTIVE INCOMES INTO PASSIVE INVESTMENTS
While journeying through life and climbing corporate ladders, one can begin to build wealth by deploying one’s active income into multiple passive investments and, in so doing, progressively build wealth by regularly focusing on using one’s savings from active incomes to build passive incomes.
Employees should adopt this habit to build wealth. They should commit to regular and consistent savings from their active incomes in their lifelong employment journeys. This calls for setting aside and regularly adhering to predetermined percentages of active employment incomes for regular savings into building wealth. I consistently decided to use 20 per cent of my active employment income to grow my wealth. This is different from the recommended percentage of 10 per cent of active incomes as contained in the “Richest Man in Babylon” by George Clarkson, who planted this habit in me from 19 years of age.
This might seem difficult at first, but what it takes is determination and frugal living as a habit towards building wealth. Rich people also employ this habit to sustain their wealth. So, the technique is not necessarily for wealth builders only. Towards this end, wealth-builders must closely watch their spending habits regularly, and control and keep track of their daily/monthly expenditures. They must regularly adjust their budgets to eliminate wasteful and consumptive expenditures, monitor and pay attention to inflationary pressures and minimise ego-driven lifestyles.
Once such wealth builders notice that their expenditures are becoming unsustainable, vis-à-vis their incomes, they must promptly adjust their spending habits. In doing this, wealth-builders must continually look up and uncover bad spending habits. Again, they must choose their friends to ensure the elimination of negative peer group pressures whose lifestyles could hinder their wealth-building goal. Their spending, savings and investment behaviours must be carefully planned to ensure their goal. This is because nobody ever earns enough to satisfy his needs. Indeed, this is a basic maxim in economics, which states that man’s needs are unlimited, while means are limited.
Bearing this in mind, wealth-builders must ensure that their spending is kept at a minimal level and as practicable as possible by limiting their tastes, lifestyles and needs to necessary things only. This is a quite common habit among successful wealth builders and the wealthy. A living legend of this habit is Warren Buffet. This 90-year-old very wealthy man is still in the same house he built in 1967 and drives himself in his old but refurbished car while continuing to sustain his wealth, having committed 99 per cent of his wealth to charity.
- ORGANISE YOUR FINANCES
The process of building wealth requires proper financial budgeting, planning and organisation. Systematically creating wealth requires regular financial planning and monitoring of deviations from set personal budgets, placements and investment returns. This is absolutely necessary. Hence, financial maps must regularly be drawn to ensure that expenditures and savings are kept in line with the goal of building wealth. Financial maps must be regularly drawn to guide spending habits from deviations away from set financial and budgetary plans for building wealth. As a habit, my set wealth-building goals are mapped, ahead of every year, towards guiding me and keeping my eyes on the ball during the year. This is important for wealth builders to keep them in check from budgetary and financial deviations. It has worked well for me.
- EVALUATE EVERY INVESTMENT OPPORTUNITY THAT COMES YOUR WAY BEFORE PLUNGING IN
It is necessary to always weigh the opportunity cost of every investment decision. For wealth builders, this ensures that costs are properly weighed in terms of expected possible returns and their associated costs vis-à-vis other available investments.
Opportunity costs must be weighed with every wealth-building decision for minimising investment losses arising from poor investment decisions in the continuous utilisation of every savings made from active incomes into building wealth.
- PLACE GREAT VALUE ON YOUR TIME
A common saying is, “Time waits for no one,” which explains why time is of the essence in building wealth. After all, wealth builders are mere mortals who would eventually die, no matter how long it may take. Hence, wealth builders must optimise their time management to avoid unnecessary time-wasting activities. Time-wasting activities should be curbed for the habit of gathering knowledge, reading, learning and relating with mentors to assist them in building wealth. Wealth builders need to form the habit of placing premium value on their time management because the same finite time is available to everybody but gives the best results to those who optimally utilise the value of time. As of habit, it is those who use their time wisely that benefit from its use.
- WATCH YOUR EXPENDITURES
We all fail many times with some of our decisions. No human is perfect. However, wealth builders must regularly augment their investment failures with sacrifices or cuts in their expenditures. Investment failures would occur, but wealth builders must adjust by discovering spending habits that would intensify such losses and use such discoveries to cover for investment losses by curbing the identified spending habits.
It is also important for wealth builders to always prepare against the worst with their investments. Wealth builders must identify potential problems/failures that may arise and plan against such failures. In doing this, wealth builders must start insurance policies to cover losses/failures. This is very vital. They must anticipate the worst when building wealth. Towards this end, wealth-builders must obtain insurance covers for their health, property accidents, fire, etc. Appropriate insurance covers must be taken regularly to protect wealth builders against the worst that could happen, which usually happens.
They must organise their finances regularly to provide insurance that will protect them against foreseeable failures. All mishaps must be identified and anticipated, with preparations made against them by taking up insurance policies, putting in place many required protections and making necessary decisions to protect their accumulations and build wealth. While in paid employment, I started with fire insurance cover over even the contents of my rented accommodation but have since graduated with my insurance cover over many necessary others.
PAY YOURSELF FIRST
To “Pay yourself first” is one of the main principles in Personal Finance.
If you are like most people, you will probably pay everyone else first through payments for food, utilities and transportation, among others, before you keep whatever you have left and that is if you have anything remaining. This, in effect, is paying yourself last.
What does paying yourself first mean?
– It refers to how you save money.
– It means you should pay yourself from your salary or from your profit.
– It means you should set aside a portion of your income to save and thereafter invest in something or an asset that will yield you more money.
– It means that you pay yourself first before you pay other bills. You have to treat yourself like a bill, an expense to be paid for. Just like you allocate money for your everyday or every month’s expenses, you should first allocate money for your savings and or investment (which is your pay-yourself expense).
– Paying yourself first ensures you manage (plan) your money before spending it on bills.
You must prioritise your ‘pay myself’ account over and above all other bills you need to pay.
To pay yourself first means that the first bill you pay each month should be to yourself.
One major way to overcome the challenge of saving and a great method for you to get to your financial destination is to “pay yourself first.”
The major challenge for people who find it difficult to start or continue with savings and or investments is finding the money to save or invest. Also, some people believe that it is a challenging task and there are people who believe that it is impossible to save and or invest.
Remember that if you are going to have savings and start investing, then it is up to you to start with what you have and where you are.
It is not how much you earn that really matters – so no matter what your earning status is, you can afford to pay yourself first.
Financial experts will tell you to start with a minimum of 10 per cent of your income. For some, 10 per cent is convenient to start with and for others, 10 per cent is a “large” amount they cannot afford to start with, at least not for the very first time.
The truth is that rather than start with 10 per cent, which is the minimum recommended by most financial experts, everyone can start with a minimum of one per cent and gradually increase this amount over time. START SMALL WITH WHAT YOU HAVE WHERE YOU ARE.
Your excuse should not be that you do not have 10 per cent to start with, at least you can start with one per cent.
Someone once defined insanity as “doing the same thing over and over again and expecting a different result.” If you are not where you want to be financially, then it is time for you to start to change your financial habit – PAY YOURSELF FIRST.