Straight out of university, a Nigerian youth wants three things: get a high paying job, travel to USA/UK, and buy a classy car. He then sets the foundation for a lifetime of bad financial decisions. Not that anything is wrong with wanting those things, the problem is the timing.
He wants it all in the next four years; so he sacrifices building a strategically focused career and acquiring skills of real value, for getting any job that pays the most today – even if it is not along his field of study or interest.
He consoles himself by saying he is just using the job to acquire enough money to go further his studies in the US/UK, and then makes the second terrible mistake of spending all he earns chasing foreign degree and travel pictures to show off on Facebook.
Finally, in between the job and the travel he buys a car using a flexible payment option or with financial assistance from friends/family. He has no long term strategic plan that doesn’t involve resetting his entire life every few years.
Every major decision resets his life – rather than build up strategically on what he has already. The high paying job is the first reset, cutting him off all his university study and field of knowledge. The car is another reset, emptying his bank account. Then the US/UK travel is the ultimate reset, he abandons all — job, car and career growth.
Not everyone follows that pattern completely, but most of us are guilty of that young man’s main sin: no long-term strategic plan that nicely builds up on all we achieve over time – especially as it relates to finances. Many of us suck at managing our money, and I want to help you break away from the common mistakes we often make in handling our money.
1. Following the Crowd
I see people blindly following the crowd. This is why most Nigerian youths have similar mindsets and unreasonable expectations straight out of school. They are more in touch with the crowd than with reality. It is, also, the main reason a lot of people went into MMM and other bad investment decisions. They hear family and friends talking excitedly about how they are making a killing from them and they hop along. A financially illiterate mind is the fraudster’s workshop.
How do you become immune to the crowd pull?
It starts with proper financial education, the same way we became immune to our grandparents’ superstitions by being educated. Regardless of your field of study and career path, you need to educate yourself on personal finance. You need to be able to distinguish between what makes financial sense and what doesn’t. That is the only way you will resist buying a car too early in life when you are daily inundated with pictures of friends in their new classy cars. That is the only way you will be able to see beyond the immediate returns people are getting from unsustainable pyramid schemes and understand that there are other more enduring ways to grow your money.
So, in a sentence, to avoid the mistake of following the crowd, arm yourself with financial education. If you need guidance on free and reliably ways to become financially educated enough to constantly make expert money decisions, just shoot me an email at [email protected]
2. Saving Wrongly
There are some, who either by nature or nurture, are able to resist spending their money recklessly. They make a regular habit of saving. Just that they commit another blunder: they save wrongly.
Is it possible to save wrongly? Yes, it is.
Mum said they bought the cow for her and my dad’s wedding for N900. That same cow now sells for over N250,000. Imagine she saved N900 that year in her bank account, today it will not even buy her a cow leg pepper-soup as the interest rate on money you put in savings account is negligible when compared to inflation (most banks even cancel any interest once you withdraw from the account more than twice in a month).
Whenever you use your bank account as your primary savings/investment account, you are saving wrongly. You might even be better off spending the money now on stuff you can sell in the future — like silverware, quality leather sofa and any other stuff with a life expectancy greater than that of a cow.
How, then, do you save wisely?
Have a proper investment account. If you are risk averse, do treasury bills and money market investment funds. If you can stomach some risk, then go for stocks and real estate investments. Just make sure you don’t hand that money to your bank, even if they say they’ll give you a good interest rate on fixed deposit account, it will still be way lower than what you’ll get from treasury bills.
3. No financial plan
If you don’t track your expenses, income and savings/investment, you are setting yourself up for financial failure. Any going-to-be-successful financial plan is built on actual historical data and forecast of periodic expenses, income and savings. Once you have put in place a structured approach of monitoring and controlling your expenses, you begin working on growing your income actively and passively. The difference between your income and expense, your savings, serve a dual use. One is to provide you a cushion for shocks that come in life — unexpected expenses and emergencies. The second is that it becomes the seed for growing your income passively via prudent investments, which is the biggest component of all the super-rich people’s wealth.
As a rough guide for you, here is my own financial plan that I have been using for years. I have it broken down into steps below:
A) Emergency Fund” I set up a high yield extremely easy to access bank account funded with my six months living expenses. It is my cushion for handling unplanned expenses and family emergencies. I don’t touch it unless it’s to cater for an emergency. And I replenish it as fast as possible. In a whole year, I might draw from it only two to five times.
B) Pay myself first: For seven years now, I have direct debit set-up on my bank account to transfer a set amount of money to my stocks investment account. And now that my income has grown over the years, I still directly move money monthly from my bank account to my investment accounts before buying any fancy gadget. How do I know how much to move? That is the use of having a historical record of your expenses; it helps you know what your typical monthly expenses are and be able to estimate how much you can save monthly without running out of money.
C) Material assets light, financial assets heavy. The one thing the fancy gadgets you buy do, right from the moment you pay for them, is drop in value. And that is the case with all material assets except land. Even the house on the land drops in value. So, I buy only the material necessities and put the rest of my money to work in the financial markets.
D) Investment portfolio mix. Based on my age, I have a mix of Nigerian stocks, US stocks, fixed income, commodities and speculative assets (forex, cryptocurrencies speculation). I am more aggressive in my investment mix because I am young and can realise the long-term returns that assuredly come with most risky assets.
And those are the money mistakes I see Nigerians make: following the crowd, saving wrongly and having no financial plan. I hope I have been able to help you identify the ones you are making and ways to fix them.
Photo Credit: Kiosea39 | Dreamstime