The year 2020 was tough as the unexpected impact of COVID-19 hurt the financial goals of many people. As the economy struggled, individuals suffered from weak income following millions of job losses while consumer prices increased significantly (food, electricity and petrol prices rose).
With income and the buying power of money falling, many people had less money to save and some even had to take money out of their savings to support their livelihood in 2020. Early indications are that the impact of the pandemic would still be felt in 2021.
So how would you like your December 2021 to look like? We are only a week into the year and this is the time for goal setting. To support your journey, we at Money Africa take you through some practical steps to achieve your financial goals.
1. Write down your financial goals
A short pencil is better than a long mind. Write down your plans for the year, from the big to the negligible, it serves as a great reminder when you need to measure and track progress. Be very specific about these goals and how you want to achieve them. Doing so forces you to think through and be realistic.
2. Draw up a budget
Your budget is the estimate of your income and expenses for a period. Capture the sources of income available to you, but focus on those that are predictable. Salary from your employment is steady enough to be estimated, also income from your other investments.
Similarly, estimate your spending, with timelines for when they fall due so as to plan for them. For instance, house rent and school fees may need months of saving, meanwhile buying groceries might not.
It is always wise to keep spending below income, especially as you need to save for big expenses. emergencies and the future. A common formula is the 50:30:20 rule that advises allocating 50% of your after-tax income to necessities, 30% to wants and 20% to saving. This is not cast in stone, you can increase the share allocated to saving if you manage your expenses better. If your income is not enough to fund your expenses, think of ways to increase your income (by starting a side-hustle, for instance). When all other means have been exhausted, you can support spending through borrowing or taking money from your savings. Be flexible, in case there are needs for changes, say you lose a source of income or benefit from an increase in income.
3. Build an emergency fund
Emergencies are unexpected events that happen to us. Most of the time, emergencies would require a financial outlay. Hence, it is important to set some money aside to meet these emergencies so that we don’t disrupt our broader financial goals. A situation where we have to liquidate our investments early, bearing costs in the process, to meet emergencies would be avoided. Invest in a way that you can quickly access your funds within hours or a few days at minimal cost.
The rule of thumb is that you should have at least six months of your monthly income in an emergency fund. This could increase but do not commit too much to this fund because you could reduce your opportunity for returns. You can save in dollars to meet emergencies outside the country.
4. Have a diversified investment portfolio
Your investment portfolio should have a long-term focus, seeing as your emergency fund is short-term. Start by determining the type of assets to invest in and how to manage the portfolio. The most common type of assets are fixed income securities (local bonds, treasury bills, Eurobond etc), equities and alternative assets (real estate, commodities, cryptocurrency, etc). As most of these securities have different risk profiles, invest in line with your risk tolerance. For instance, a retiree won’t invest a large share of their portfolio in stocks due to the high risk of losses. This would also mean that your potential returns might be lower because assets with higher risks often offer higher potential return.
In deciding how to invest, you can decide to handle this yourself or speak to investment managers. If you are new to investing, a mutual fund (equities, money market, bonds, balanced etc.) is a great place to start. It is relatively affordable so you don’t have to break the bank and you don’t have to bother yourself with the day to day management of the fund.
Ensure that your portfolio is diversified, meaning that it includes different classes of assets in a bid to manage risks while generating good returns. For instance, you can diversify from Nigeria’s risk by holding assets in dollars. Also, in a low yield environment where treasury bills offer below 1% return, you might want to consider riskier assets with high return potential.
9. Reinvest your returns
If you keep spending the returns on your investment, it’s like planting a seed and then digging the soil. The seed will not do very well. Compounding is a powerful principle.
8. Invest in personal development
Personal development is the biggest investment you can make. The returns are infinite. Take a course, read a book pertaining to your field. Watch a youtube video or listen to a podcast. Don’t end 2020 the same way you began. The better your skillset or knowledge base, the higher your potential earnings and ultimately the larger the amount of money you can save/invest over time.
10. Discipline through an accountability partner
Have you made previous resolutions and failed to keep them? One way to ensure better discipline is to have an accountability partner. An accountability partner is someone who holds you to account regarding your goals, and encourages you to stay on track.
An ideal partner should be someone who understands your goals and weaknesses. They should also have goals they are aiming for as well, so you are motivated too.
Oluwatosin Olaseinde is the founder of Money Africa, a financial literacy company and subscription-based financial edtech platform.