Financial makeover

Many questions were raised on the last two articles on financial discipline. Some readers think they might need financial makeovers. How can we determine if we need a financial makeover? Although everyone has peculiarities that make a generalization almost impossible, there is a rule-of-thumb method that we can use.

If you, as a monthly salary earner, have earned an average of one million naira annually for the last five years, then your investment portfolio at the end of year five should be at least one million naira. This does not mean you save/ invest 20% of your income annually. That is impracticable for most people.

The suggestion from financial advisers has always been that we invest 10% of our income. So, if in the last five years you have invested an average of one hundred thousand naira a year or eight thousand five hundred naira monthly, compound interest/ income on the investments from year one to year five would bring the total investment size to one million naira. Many of us can afford to invest more than that, so how many of us have the commensurate size of investment portfolio? As many as cannot say “yes” to the last question need a financial makeover.

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Whilst changing of habits and learning new skills may be the obvious solution, if you have a large amount of personal debt, especially consumer debt, the first step in the financial makeover is to make a pay down all the expensive debt. Consumer debt attracts up to 48% per annum – there is no point putting money into investments that earn less than 20% per annum if you have debts that charge double your investment income. So, pay down expensive debt first.

After taking out the compulsory expenses like taxes, debt repayment and religious obligations, you need to pay yourself next. Put the money into your investment account. Spend what is left after saving. Most people try to save what is left after spending – no wonder there is nothing to save. So, save first and spend what is left after saving. Do not panic and think you cannot survive with what is left. If that were true, it would mean anyone who earns less than that amount would die. Of course, you see how ridiculous that sounds. You will survive, you are only disciplining yourself for a little while.

Develop the habit of shopping around before buying. Review all the subscriptions you have, are they all useful? Do you need the 700 TV channels you subscribe to on Cable Television? How about your mobile phone package, could it be cheaper? How often do you go to the gym, yet you have a full annual subscription? Wouldn’t it be better to replace it with a pay-as-you-go package? How about financial costs and bank charges? Have you considered what your insurance premium covers on various policies? Would your premium be lower if you changed the coverage or even moved to another insurer? Many banks have various types of accounts. With the introduction of stamp duty by the Federal Government that charges fifty naira on every deposit into a current account (irrespective of deposit amount), do you still need a current account? Especially now that payments are not made via cheques but via electronic transfers, probably not.

Other habits and skills that would help us achieve our financial makeover include negotiation skills. Make it a habit to always negotiate the price of things, especially in highbrow shops where their profit margins are astronomically high. Many of us would not hesitate to knock off N200 from the income of a struggling street hawker but we would be reluctant to negotiate prices in shops where they make up to 200% margin on their sales. Another habit is to reduce the amount of dining out we do. Pack your lunch to work. Entertain guests at home. We must also avoid using shopping as a pastime; it only leads to unplanned, unnecessary spontaneous shopping especially when they lure us with deceptive advertising e.g. “Save 50% if you buy 2 items”. My response is “Save 100% if you do not buy anything”. Procrastination can also lead to financial loss. For instance, hotels and airlines tickets get the more expensive the closer your booking dates. Also, if you delay shopping in big local markets and supermarkets, you are forced to buy expensively from your Shylock neighborhood corner shop.

Whilst some of us may not need a full financial makeover, everyone can adjust one or two habits to improve their financial efficiency. Let us make the necessary changes. Happy investing.

Nigerian Tribune