This is a story of Tobi, an ambitious graduate with a first class degree from University of Lagos. Tobi studied accounting and worked extremely hard during her university days and this paid off because she landed a high paying job in a top audit firm. With her good salary, one could easily conclude that she was quite comfortable and financially stable, but unfortunately this is not the case. Today, Tobi is 30 and struggling with her finances. She has realized that her income simply isn’t cutting it for her anymore and her monthly pay seems to vanish almost immediately it comes! All those years of impulsive spending, lack of financial planning and no savings are finally catching up with her.
Now many of us can relate to Tobi’s situation. Perhaps you want that new Blackberry phone that just came out, or those new pair of shoes, or even a brand new car to show off to your colleagues at work. Let’s be honest, if we purchased all our wants, triple of our salaries may not even be enough and we would continuously find ourselves struggling like Tobi to stay afloat in our complex financial environment. Here are a few tips to guide you towards financial freedom:
The Budget
A budget is like a compass, and what it does is to direct and guide you towards how your income should be spent. Our recommendation is for you to create an excel sheet and plan ahead of how you ideally want to utilize your income in advance. Identify your spending, record and track it and this will help you determine where you need to cut down. You may also consider adding up your monthly expense and subtracting it from your monthly income. If your get a negative number or a significantly low figure, perhaps it is time to re-evaluate your spending.
Personal Savings
An important lesson to learn from ants is their ability to store up supplies during the dry season, to enable their survival on the rainy days. We can apply this too by saving. A specific amount should be stowed away as your personal savings after all obligations and recurring needs have been settled. Even if you think your income is small, you must consciously make provisions to save, especially for an unforeseen occurrence. If you have a fixed monthly income and feel you may exhaust it all before the end of the month, you may consider opening a bank account with limited withdrawals where you can put your savings in.
Income Portfolio
In financial management, the concept of “making your money work for you” has been continuously emphasized. This concept simply means you have to make money, invest it and then churn out income from your investments. This is known as “passive income” because you are not actively earning it, but rather you have set your investments in motion and benefiting from the proceeds as they come.
Passive income can be created by building an income portfolio. An income portfolio is an investment portfolio designed specifically to provide you with a regular revenue stream, but may not give you huge capital gains. It is important to note that building an income portfolio doesn’t happen overnight and it takes adequate financial planning, advisory and time to build a profitable portfolio.
The Portfolio Process
Fixed deposits, stocks, bonds, and mutual funds are all avenues to consider for investment. Ensure that you have a considerable amount before approaching a fund manager. Certificates of deposit and other interest bearing accounts should be incorporated in an income portfolio and be sure to negotiate the highest returns possible.
As you consider building an income portfolio, focus on investments that offer regular payouts. Dividend-paying stocks are popular for income portfolios because they regularly pay out a portion of profits to shareholders. You must seek professional advice before making any investment in stocks.
For bonds, you may purchase corporate or governments bonds to receive regular interest payments. At the end of the bond term, you will receive your principal back and you can choose to reinvest in more bonds in the future.
Finally, it is important to understand that all investments come with risks and you must be precautious when investing. For example, dividends can be cut or eliminated at any time, or you can sustain capital losses from a stock price drop.
In a nutshell, your financial independence will result from effective budgeting, saving, proper financial counseling and investing to attain multiple streams of income.
