It’s the start of a new week and I am back with another personal finance article. Last week, I posted the first part of this article. Click here to read it.
I have been intentional about my finances since I turned 19. Here are some useful tips that are helping my journey to financial freedom.
- Know your Monthly Income and Expenses
Calculate your monthly income and expenses. If you are an employee, I am sure you know your net salary. Beyond your salary, what are your other sources of active and passive income? If you own a private business, do you pay yourself a salary? You must treat your business as a separate entity. Thankfully, most of our incomes get credited to us through our bank. Simply, review your bank statements and accumulate your income.
What about expenses? In the same manner, we can track our expenses monthly. You can simplify this, by running your daily expenses through a dedicated bank account.
2. Calculate your Net worth
To know your net worth as of today, sum up your assets and less any outstanding debt. Below is a sample net worth calculation.
Queen’s Net worth Assets as of September 2022
| S/N | Item | Amount | |
| A | Assets | ||
| 1 | Real Estate | ₦20,000,000 | |
| 2 | Car | ₦3,000,000 | |
| 3 | Retirement Saving Account | ₦11,000,000 | |
| 4 | Eurobond | ₦7,000,000 | |
| 5 | Stocks | ₦500,000 | |
| 6 | Treasury Bills | ₦650,000 | |
| 7 | Fixed Deposit | ₦100,000 | |
| 8 | Savings | ₦500,000 | |
| Total Assets | ₦42,750,000 | ||
| B | Debts | ||
| 1 | Mortgage Loan | -₦18,000,000 | |
| 2 | Car Loan | -₦1,000,000 | |
| Total Debts | -₦19,000,000 | ||
| C | Net Worth (A – B) = C | ₦23,750,000 |
3. How Many Months can your Net Worth Last?
Once you know your net worth and have estimated your monthly financial expenses, you can calculate how long your net worth can last. Our case study character, Queen estimated her monthly expenses to be N300,000.
To determine how long your net worth can last, divide the net worth by your monthly financial need. Using Queen’s financial records, her net worth can fund her lifestyle for 79 months.
| Net worth – Illiquid Asset | ₦23,750,000 | = | 79 months | |
| Monthly Expenses | ₦300,000 |
Note that this metric can be calculated in terms of both absolute net worth and liquid net worth. Within the context of funding monthly expenses, liquid assets are resources that can be converted to cash reliably within 30 days. Real estate and privately held businesses cannot be sold quickly.
Investors with hard-to-liquid assets, I will advise you to adjust your calculation as follows:
| Net worth – Illiquid Asset |
| Monthly Expenses |
4. Make a Financial Plan
First, estimate the amount of financial capital you need so that you can quit working forever. Queen is 30 years, her estimated financial capital requirement is N2 billion. To reach N2 billion from N23.7 million requires her to create a financial plan. She used the following checklist to design her 30-years financial action plan.
As you invest your wealth, it is important to consider the following to avoid incurring significant financial losses.
(i) Reduce the Expense-to-Income ratio.
(ii) Invest in asset classes with a high return on investment.
(iii) Hedge her finance.
Other Important Considerations
- Understand your stage of life.
- Understand your capacity to take risks.
- Consider your investment horizon.
- Do your research and seek expert opinion before investing.
- Diversify your portfolio and hedge against risk. Invest across investment types and currencies.
- Monitor your investment and review your progress. Adjust your portfolio as you go.
- Buy insurance cover, especially for high-cost emergencies e.g. property, life, and medical.
- Have an estate plan to protect your assets.
MMBA11
Thinking Fast & Thinking Slow