The article for this week is a request from a friend who wants to know how to save and build wealth. I’ve also learn’t a lot from carrying out this study.
Financial Management and Planning
Personal financial management is about budgeting & planning which includes all financial decisions and activities of an individual, such as: insurance, savings, investing, debt servicing, mortgages and more. Financial planning generally involves analyzing your current financial position and predicting short-term and long-term needs.
To accumulate wealth over time, you need to do three things:
- The Desire to make it happen: This means that before you begin to save or invest, you need to make that decision or have the determination to make it and succeed at it.
- The will to save: Once you have an income that’s enough to cover your basics, you need to develop a proactive savings plan, the suggestion is try to save 10% of your income.
- Strategy to invest: Once you’ve begun a monthly savings goal, you need to have a plan to move from savings to investment and to invest prudently.
Depending on your level of self-discipline there are four levels of wealth management that can be attained:
Job Security (employee)
Financial Security (self-employed)
Financial freedom (developer)
Financial independence (investor)
- Job security: Job security is the assurance a person receives that a current position is secure without the risk of unemployment accompanied with regular income.
- Financial security:Financial security refers to the peace of mind you feel when you aren’t worried about your income being enough to cover your expenses. It also means that you have enough money saved to cover emergencies and your future financial.
- Financial Freedom: Financial freedom is most commonly defined as the point at which your assets (stocks, bonds, real estate, etc.) produce enough income to cover your baseline expenses.Financial freedom depends on you and how you perceive it.
- Financial Independence: Financial independence is generally used to describe the state of having sufficient personal wealth to live, without having to work actively for basic necessities. For financially independent people, their assets generate income that is greater than their expenses.
4Savings Culture and returns
There seems to be a relationship between savings culture of a people and prosperity of the nation. The data below gives the percentage household savings and savings as a percentage of GDP of some countries:
Country Household % of GDP
- China – 38% 51%
- Switzerland – 19% 7%
- India – 7% 29.8%
- Sweden – 72% 29.0%
- Germany – 67% 26.8%
- France – 89% 21%
- America – 6% 5%
- Nigeria – 5%(est.) 4%
- Philippines – 5%(est.) 9%
A Chinese proverb wisely states: “The journey of a thousand miles begins with one step.” Maybe this explains why the Chinese have lots of funds to invest both within and outside their country. India is also an emerging economy and the high savings culture may also explain their expansion and investments outside of India.
The book Richest man in Babylon by George Classon is a must read for anyone planning to start a savings/investment culture.
The table below shows return on savings/investment over a 20-year period and various amounts and various estimated return on investment. This computation is in Naira, the Nigerian currency.
The implication of this table is that if you are consistent and invest as little as N5,000 every monthly 5% return on investment without missing any month, on the 12th month of the 20th year you will have saved N2.03 million. The challenge is that we are all not willing to wait that long, we all want the jack pot like yesterday.
Financial intelligence is about making money work for you. When money works for you:
- Every Naira is an employee. Each Naira works to bring you even more Naira while you’re asleep.
- Passive Income: Interest, dividends, real estate income, royalties, residuals, annuities
- Your money can work for you or it most certainly will work for someone else.
“What do you do?” versus “What do you own?”
- The key is “What investments do you own that will bring you passive income?”
Being Rich” versus “Being Wealthy
- Being Rich is about how much money you possess in a specific moment in time.
- Being Wealthy is about . . .
- how much money you keep
- how hard it works for you
- how much is left for future generations (who know what to do with it)
- Being Wealthy is about exploding your Passive Income. (How long you can survive without ever having to go to work?)
Creating wealth is being Successful, however, to be rich is nothing more than being a Success Fool (Seyi Wright; Choose to make a difference)
Assets & Liabilities
Investing requires knowing the difference between an Asset and a Liability.
- A True Asset gives a positive cash flowevery month or as may have been structured.
The challenge is how to make Passive Income cover lifestyle expenses forever.
Financial Literacy: This is about knowing what to invest your funds in, when to invest and how to invest.
- Money market – savings, deposits, treasury bills, mutual funds
- Securities – stock market, tradable bonds
- Properties – real estate
- Business investments – multiple income streams (investments in non-quoted companies)
- Life Assurance policies, Pension plan
A mixed investment portfolio is said to be the best with risks diversified.
How do you save in a recession? It is challenging, the only advice is start anyhow, if you can’t save 10% start somewhere.
Rich dad, Poor dad by Robert Kiyosaki
Choose to Make a Difference by Seyi Wright