Do you have a standard, a minimum return on investment you expect from each asset class? Portfolio restructure may require that we sell low yielding assets and buy more profitable ones. Of course, before every fresh investment, we must do a fresh due diligence not only on the investment asset and those who manage it on our behalf – the company management and their corporate governance culture. This implies that every time we buy more of an asset we already own, we should do a fresh due diligence exercise. In addition, must be careful not sacrifice healthy portfolio diversification in our bid to retain only high to yielding assets. Our portfolio must not be concentrated in one asset class or one asset. Of course, concentration is unavoidable when we start, but our goal must always be efficient diversification. So, another financial makeover task is investment portfolio review and restructure.
Next, we must carefully evaluate our expenses. This may require the whole household sitting together to evaluate things, otherwise, family members can jeopardize our best efforts at making over our expenses. Explain the benefits of financial prudence. Develop the habit of shopping around before buying. Review all the subscriptions you have, are they all useful? Do you need all the 700 TV channels you subscribe to on Cable Television especially in these days of YouTube etc.? 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. Do you still need a current account? Why pay stamp duty on every deposit into a current account especially now that most of your payments are via electronic transfers? Itemize expense that can be reduced or even eliminated but make sure you replace that with more budget-friendly, fun alternatives. The whole family needs to work together to achieve this financial makeover task.
Another aspect of financial makeover we need is to improve on is our financial intelligence. We have started at this already, just by reading this article weekly. To gain financial intelligence, we need to have a good working knowledge and understanding of the financial concepts that govern wealth management. A key one is compound interest – interest accruing on interest. It works well for you if you have money market investments, but it can kill a business or render an individual bankrupt when it is accruing on debts. We must also understand how to appraise return on investment (ROI) – is the return per annum? Does it come in revenue (cash) form or as capital gains (increase in asset value) or both? Which fees and taxes will be applied to the ROI and what is the adjusted return? We need the knowledge of ROI to be able to accurately compare investment options and determine which asset to invest in. How about market knowledge? Every investor should read financial news especially those concerning sectors we have invested in. Such news may be the determinant between exiting an investment before you lose money or watching helplessly as the asset deteriorates. There are many other aspects of financial intelligence, and these are readily available on the internet as we can subscribe to free personal finance sites. So, that continues this very vital task that determines the success and sustainability of our financial makeover.
Next comes financial discipline. This is actually the foundation for all financial success, and it would determine the success of our financial makeover. For some of us, the reason we need makeover in the first place is due to financial recklessness. So, how then can the cause of our problem be the solution? Sadly, it is the only lasting solution. Support for financial discipline can be obtained through the use of technology – mobile personal financial management (PFM) app, available in your phone’s store, can assist with financial discipline. We can also join investment clubs where there are peer support and peer review mechanisms to motivate us to be financially disciplined. So, the task for financial discipline is getting tech or human support. Also, you can check online for past articles on effective strategies for financial discipline.
Not all of us need a full financial makeover, but everyone can undertake one or two of the tasks to improve our financial efficiency. Let us make the necessary changes. Happy investing.
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