There is a huge debate surrounding the fact that this generation lives above their means. We have a spending culture that surpasses the realization that we need to invest some of our earnings. We’ve all heard the stories; the girl with a Chanel bag collection to rival Winonah De Jong’s, but squats in her cousin’s house because she has nowhere to live; or the guy that drives a GL 550 but can’t afford the petrol to put in it. These stories may sound absurd but they are a reflection of the misplaced priorities in our society.
Most of us were raised to work hard, be frugal with our spending and save for a rainy day but I’ll just say what we are all thinking in the back of our minds…what if the rainy day never comes? The reality is, this is the ‘YOLO’ generation; we live for instant gratification. So how do we bridge the gap between our parents’ philosophy and our love for the finer things? Simple answer: moderation and planning.
I LOVE Chanel bags and trips to Europe, as much as the next person but I also have financial goals that demand that I invest today if I want to ‘Ball’ tomorrow. I am a proud advocate of living the good life and I don’t believe in shaming people for liking the things that make them happy but there’s also no point in accumulating designer bags with no assets to match my spending. It’s not about living like a hermit but about striking a balance, knowing the difference between what you want versus what you can afford over a period of time.
What if you could have it all?
An effective way to live within your means and still live remarkably is by dividing your income into three parts, Long- term financial goal, short- term financial goal and living expenses. (See illustration below)
MONTHLY SALARY N500, 000.00
LFG (20%) N100, 000.00
SFG (10%) N50, 000.00
LIVING EXPENSES (70%) N350, 000.00
Long-term financial goal 20%: A long-term financial fund represents the proportion of your income you put aside to grow your assets in the long run. i.e. purchasing land or building a stock portfolio.
Here are some tips that ensure you maximize your earnings.
• Put aside this 20% BEFORE you spend even a Kobo of your Salary.
• To ensure your money works harder for you, instead of a low interest savings account, invest in a blend of fixed income and equity products (Typically a 7-15% p.a return on your investment) .In Alero’s case 20% of her monthly income is N100, 000. Using a 70:30 fixed income to equity ratio. She would invest N70, 000 in a fixed income product that guarantees her principal and gives a decent return, that’s significantly higher than the interest on her savings account. The balance of N30, 000 could be used to buy stock on the Nigerian Stock Exchange.
• Many people are skeptical of the stock market maybe because they’ve been burnt before or have heard of people who have been negatively affected. However, the term ‘high risk high return ‘ comes to mind.
• The key is to have a long-term view, invest in stocks that are undervalued, have high liquidity and may give regular returns in terms of dividends and bonuses. Key things to remember, DO NOT borrow to invest in stock and IT is NOT a money-doubling scheme. (Speak to a broker or investment manager for advice).
Short-term ‘frivolous’ goal 10%: This would represent the proportion of your income you set aside towards that seemingly frivolous purchase, that makes life much more interesting, be it a Rolex watch or a BMW. Ultimately what determines how quickly you are able to buy this item will depend on how much you earn. So if it takes you 10 years that’s probably a good indication that it’s not something you can afford right now.
Living expenses 70%:
Are you spending more than you earn? Without borrowing or begging, how comfortably can you pay your monthly bills?
I have a philosophy, the way you spend N10 is the way you’ll spend 10million. For instance, ‘ Ikenna knows his rent is due in September 2015 but every month when he gets his salary he’s living a ‘champagne lifestyle’ (‘YOLO’ abi?) Come September 2015 he tells his wife and landlord that he doesn’t get paid enough and times are hard. This is just irresponsible. You knew rent was due the following year. It was not a surprise; it was an obligation you had 12 months to prepare for. Rent is not a surprise, people! You can’t spend all of your salary and expect manna to fall from heaven when rent is due. If you are guilty of living like this, even if you got a 10million Naira payday you would be broke in a year.
Ultimately, we must dispel the myth that we are too young or too poor to invest; I hear people say this all the time. ‘I will invest when I hit’! ‘You can’t save what you don’t have!’ These are all excuses. Investing should be a part of your lifestyle, just as you ARE what you eat; your future is what you invest in. You can’t expect to live a luxury life style in the future if you are making poor financial choices today.
We all deserve nice things but planning towards your obligations and tracking your spending are two important factors when it comes to finding the right balance, living comfortably and ensuring your financial future.
Photo Credit: creativefan.com
Arese is the Head of Wealth Management at Partnership Investment Plc, and is responsible for building the company’s wealth management division, through business development and growing existing client relationships. Arese holds an M.S.C in Urban Economic Development from University College London (UCL) and a B.S.C in Business and Management from Aston Business School.Her other interests include, world travel, reading, playing tennis and squash.