Personal Finance in a Recession

Recession: A significant decline in activity across the economy, lasting longer than a few months. A recession generally lasts from six to 18 months. Source

A country’s Gross Domestic Product (GDP) is the typical metric used to ascertain it’s economic activity. The most current information I could find on the Nigerian Bureau of Statistic’s website for Gross Domestic Product (GDP) was for the period up to Q3 2015 (July – August) which showed a slight improvement following three consective periods of decline.

Aside – I used to have a lecturer whose mantra was “three is a trend”. Hashtag useful life tip.

It’s hard to get away from the news of how badly Nigeria’s economy is doing. You’d have to be living in the back end of beyond not to know that:

• the Naira is tanking, whether the government likes it or not
• power is still as unstable as ever after they did ogboju for us in the weeks immediately after the elections last year
• the Boko Haram insurgency is still a thing no matter what “technical” victory they declare
• the drop in oil prices means there aren’t enough dollar bills in circulation to fuel our import economy.

Haaaay! I forgot we were looking for our budget at one point. At least it passed its second reading at the Senate today. According to their Twitter handle. Did you follow the debate? We still have a ways to go before it’s passed into law.

The #2016Budget #AppropriationBill passes its second reading at the Senate.

— Nigerian Senate (@NGRSenate) January 27, 2016

 So, how exactly does this impact the “individual” beyond the obvious drop in spending power?

1. Job cuts – We have an unquantified unemployment problem in Nigeria and are set to see more cuts in the formal economy. For those who can raise the cash, starting a business will most likely be the next move.
2. Lifestyle changes – I forget who was tweeting earlier about Nutella steady creeping towards the N1,500 mark. I had just been dreaming of Nutella crepes just before that as Pancake Day fast approaches (how is it lent already???). Way to burst my bubble buddy. On a serious note, adjustments will have to be made in how we allocate our money to non-essential items because…there’s rice at home.
3. Savings and Investing – These are usually the first items to take a hit at times like this as resources are channeled to more pressing needs. In fact, they may be depleted as the proverbial rainy day is perceived to have arrived. There’s no one size fits all solution to this one. I will say though, if it’s not life threatening, try not to dip into savings. Also, try to put something away even if it’s N1,000 to maintain the habit because once it’s broken…don’t ask me how I know.
4. Hello rent hikes! If Baba Landlord usually jacks up the rent in January, you have limited options because its happening across board. He  has USD school fees to pay yo! This is not a noisemaking exercise..
5. Overseas Under/Postgraduate Studies – *laughs in exchange rate*
6. Distrust of the powers that be – THEY ARE COMING FOR YOUR MONEY. Or are they? The excesses of the previous administration and the past records of the current placed high expectations on the incumbent to deliver…something. The slide in oil prices unfortunately means that there will be less money in the coffers for this administration to execute their plans for this financial year. Governments are revenue generating entities and will always look for ways in which to do so. We have seen a number of policies and proposals in the last few days/weeks aimed at raising these funds from the general public. Quite a few people have moved from outright support to more neutral ground or have made a complete about face.

It’s not all doom and gloom though! Coming through trying times like this is all in the attitude, in my opinion. (5 points if you get the reference. Another 5 if you comment telling me where it’s from).

“A recession: a period in which you tighten your belt, a depression: a time in which you have no belt to tighten.” (Braude Speaker Encyclopedia, p. 46.)

It’s usually hard to see areas where we are not optimising our money while things are good. I’ve certainly seen a few tweets recently where people have said they need to fix up their financial life because things are starting to pinch a little. There’s no better time to assess where we need to make cuts in terms of our expenses and reducing debt than right now. Mostly because we don’t have a choice as we are having to make decisions about money when our purchasing power is being eroded.

Need help figuring out a Financial Plan? Start here –

Budgets are sexy

Budgets don’t work (or why you should budget)

Budget Template

Financial Literacy 101

Liquidity Management

Think you know how to manage money?

So, you’ve been reading SOAB for the past few weeks and have done further research on the topics we’ve been talking about. You’ve become a dab hand at creating a budget too (we won’t talk too much about sticking to it 100% yet because nobody is perfect ;)) so we’re all set. Right?

Don’t forget to grab the 2016 Budget Template here

Well actually…

There is this aspect of personal finance that’s mostly neglected which I want to get into today.  It’s called Liquidity Management.

Liquidity refers to the ease with which assets can be converted to cash without incurring significant penalties. As such, liquidity management is the process by which an individual balances the need for cash to meet unexpected expenses with their desire to improve their wealth position.

Why is this important?

Have you ever found yourself in a position where you really want to buy something but doing so would mean dipping into money that was intended for something else? Or the opportunity comes up to make an investment but the way your money is set up…

If we use the stock market as an example, conventional wisdom is to buy shares when prices are low and sell when they are high. The Nigerian market has had a lot of lows in the last few months but none quite like what we are experiencing at the moment. There’s no better time to pick up quality stocks that might otherwise have been out of your reach. However, if you don’t have cash or near-cash investments stashed somewhere…OYO.

What does a liquidity management plan look like in real life?

Let us use the example of an Emergency fund. Say you plan to have an Emergency Fund for whatever reason. You fix the amount for this at the equivalent of 3 months’ salary to start with. If you earn ₦100,000 pcm, that works out at ₦300,000.

Now you need to decide how you will go about building this up. Will you make monthly deductions from your salary? Say 10%? Will you get a side hustle going and channel all the income from that towards your emergency fund?

When you have figured the source out, you need to understand the timing of your needs. Why are you creating an Emergency Fund? Are there expenses that might crop up in the next month or so that you want to cover from there?

Next, you will have to decide where you will keep the money.  If you hold cash, you might go ahead and spend it when that “life threatening” situation comes up or simply because you “deserve a treat”. If you keep it in a current account, you won’t earn anything on it. A savings account doesn’t pay much by way of interest (looking at you bank-which-shall-not-be-named. What am I supposed to do with ₦7.09 interest???).  So naturally we start to look at higher paying instruments (call accounts, fixed deposits, money market and mutual funds, and T-bills).

To bring all the elements together, say we decide we want to hold the equivalent of half a month’s pay in easily accessible funds. A call account pays more than a savings account and has shorter durations than fixed deposit (some banks offer 1 day call) so you can have near-cash at all times. The remainder of the money can go to something which pays higher but might need a notice period to liquidate like a money market fund.

The net effect?

1. You are covered incase of emergencies.
2. Your funds earn their keep. (Ha!)

We went through an exercise a couple of weeks ago where we listed out our assets and liabilities (did you download the worksheet?). I want you to take a minute to look at that list again and figure out which items on that list can be exchanged for cash in the shortest timeframe possible e.g. by close of business on any given day or the end of the next working day. Did you get any ideas to change how you currently handle cash?What would your ideal situation look like?

Need help creating a Liquidity Management Policy of your own? Click the image below to download a template!

Financial Literacy (What it is and Why it’s important)

We have spent the last few months discussing budgeting and saving here on SOAB. This month I will be focusing on pulling together the outcomes of those discussions with actual guides to move you beyond the thinking-about-it stage to taking action (look out for a bonus at the end of this post!).

As you can imagine, if we try to fit all of that in one post, we’ll be here for a good long while. That’s why January will be financial literacy month here on SOAB. We’ll start off today with:

1. What Financial Literacy is
2. Why Financial Literacy is important
3. Financial Literacy 101

A few months ago, I ran a Savings and Investing Habits survey here on the blog (it’s still open by the way) to gauge where people were on the issue. The majority of people felt that they had little to no knowledge or information on saving and investing options available to them. Another trend I noticed was that the more money people earned, the less likely they were to save or invest.

I’ve also had a few conversations on twitter with SOAB readers who have already started building great saving/investing habits but were looking to consolidate what they knew.

All of this inspired the theme for this month.

A simple definition of Financial Literacy is understanding how money works and having the necessary skills to make sound financial decisions. In essence, it is all about how we earn money, spend money, save it, invest it and give it away.

Increasingly these days, the individual has to bear the responsibility for educating themselves on saving and investment options. It doesn’t help that the financial services sector is plagued with jargon that is not easily accessible to the layman. This in turn makes the simplest thing appear burdensome and kills the ginger. Trust me, I work in financial services and it does my head in!

There are increasingly more options for consumer spending available to us right now that makes it super easy to pay for things even when we don’t need them. Add to that the growing capacity for debt that is becoming evident and we just might have a real issue on our hands. It is important to be able to evaluate the options available to us and make decisions, not in isolation, with a view towards achieving our end goal.

This applies to the consumption of financial products as well. How do you decide between all the different bank accounts, brokerage accounts, investment schemes, insurance, HMO, mortgages and a host of other financial products if you don’t know the questions you ought to be asking in the first place?

The majority of us in Nigeria don’t get a payslip unless we request it so we don’t even know or understand what deductions are made and the implications of said deductions.

Another reality is that human beings are generally living longer so we are going to have a fair few years post-retirement in which we will have to maintain whatever lifestyle we adopt. The options here will be determined by how well one prepares before hand. Never mind that we are also having children later in life so we most likely will have dependents post-retirement unlike our parents’ generation which had at least a few years to sock away some retirement saving.

How important is Financial Literacy? @sisionabudget breaks it down in this post http://ctt.ec/aL9kj+ (Click to Tweet)

I wrote a thing on thealaroro.com the other day (you really should check it out) in which I outlined the basics of a good financial plan. We’ll be building on that over the course of January here on SOAB.

The first step on the journey to acquiring financial knowledge is to determine what your financial priorities are. This is important because it becomes very difficult to stick with a financial plan if you don’t have a goal you are working towards.

The first step on the journey to acquiring financial knowledge is to determine what your financial priorities are. @sisionabudget  (Click to Tweet)

Don’t forget to grab the free worksheet at the end of this post to help you figure this out!

Once we know what we’re working towards, it’s time to assess our current financial position.

To determine your current financial position, you will have to list:

• Your sources of income
• Your expenses
• Your assets
• Your liabilities

A lot of time and effort has gone into writing about managing income and expenses on the blog most notably here and here. Let’s focus on assets and liabilities shall we?

Assets

The definition of assets in the SOAB Glossary of Terms is:

a resource controlled by an entity as a result of a past event and from which future economic benefits are expected to flow. More colloquially, it is an item of property owned by a person or company which is deemed to have value and can be used to meet obligations.

So fancy! Generally speaking, there are two broad categories of assets: Depreciating Assets and Income Generating Assets.

A depreciating asset is any item of property that has a limited lifespan and can be expected to decline in value over the duration of its life. By this definition then, most things that we own fall in this category. That car you spent 2 years salary on? Your laptop, furniture, electronics…

Notice that a lot of the things on that list are consumer electronics. Over time, newer models will come along to replace what you own and you will have to replace them either because the manufacturer no longer supports the model you own or you want to keep up with the times.

On the other hand, income generating assets, as the name suggests, are assets you acquire or invest in which generate money periodically. In this instance, capital appreciation is not the primary focus. It is all about securing steady cashflow. Examples here include: dividend growth investing, product creation/entrepreneurship and rental income.

Now that we know what an asset is and the two broad categories of assets, can you think of all the things you own that can be classed as assets?

Moving on to liabilities, we defined liabilities as:

 Any monies or services owed to another party.

Pretty straight forward huh?

Bringing it all together.

 We can start to build a picture of our finances on the basis of the concepts we have just explored. All these moving parts can be put together to come up with your Net Worth. Your Net Worth is

 a snapshot of your financial health at one moment in time.

To figure out what this number is in absolute terms, you will subtract your liabilities from your assets. The number left over is your Net Worth.

Don’t panic if that number is small. The whole point of this exercise is to determine what ground zero is for you and make a plan for taking steps forward.

I mentioned earlier that I put together a worksheet to help you make sense of what we’ve been exploring today. Click on the image below to get it.

Leave me a comment to let me know what you think about this topic.