A quick guide to wealth tips to grow financially in 2020
Research carried out in Sub-Saharan Africa, less than one percent are born into wealth and under ten percent are born into the middle class. In general, we are not taught in any formal framework how to keep money or grow it—basic personal finance skills are difficult to learn. As a result, even when a young adult starts earning more than they need to survive, they end up living from pay cheque to pay cheque because they think about their incomes largely in terms of spending and haven’t learned how to save or build assets in proportion to what they earn.
Broke means, if you lost your primary source of income today, you wouldn’t be able to maintain the lifestyle you have become accustomed to because you have no assets to rely on. Many people have built expensive lives they can’t sustain because they continuously spend everything they earn and as such, have a revolving door for their money.
We must dismiss this idea that we will always make more money. We have a finite amount of productive years to work; many people will never be as agile both mentally and physically as they are now.
What happens in thirty years when you can no longer work as hard and have no cushion to fall back on? Poverty and dependence on others is inevitable. In order to build wealth, this mentality has to change. Developing a wealthy mind-set requires the understanding of the concept that the way you spend, invest, and manage ten dollar is the way you’ll spend, invest, and manage ten million dollar.
What it Really Means to Be Wealthy As a society In Africa, we tend to measure financial success based on spending patterns, but our metrics are faulty. For example, the kind of expensive lifestyles we live, by living in one of the best parts of area and very expenses accommodation. Afford material things and form the habit of always saving parts of your income to be used for investments and emergency in the long run. There is no need to show case you are wealthy by buying material things that depreciate in value instead of investing in assets that appreciate in value. However, building wealth is more about how much you keep.
Broke people and rich people approach the same amount of money differently and here’s why: broke people think it is about how much you earn but rich people know it’s about how much of your income you are able to keep and convert into assets that can provide you with an income in the future. The fundamental difference is that wealthy people understand the relationship between how we earn and how we spend and they know where the balance is.
Active income is the income you get from services rendered, it is usually your income from your job or business. For example, if you work at a bank and you make three hundred thousand dollar a month as your salary, that’s your active income. Or, if you run a catering business and you make three hundred thousand in profits every month that’s your active income.
Passive income in simple terms is money that you make while you are sleeping. It is the income you get regularly from investments you’ve already made. Good examples are dividends from a stock portfolio, or rental income from a property you own etc.
What Is Financial Freedom?
When passive income exceeds your expenses. Ideally, the goal is to get to a point where the assets you’ve accumulated can pay you enough of an income to pay for your lifestyle. For example rental income from a property you own can buy you a car or a holiday to the South of France. Or, the dividend cheques from your stock portfolio can buy you a Chanel bag.
Most people don’t know where the money they earn goes. What percentage of your income goes to food? Transportation? Clothes? Just like in any successful business where you track the revenue and costs periodically, it is also important to track the expenses in our personal lives. We have to learn to spend with intention by allocating our resources to reflect the lifestyle we want and are able to sustainably afford. This all starts with having a clear idea of where the money is going in the first place.
You have to give up the excuses and learn to control money instead of letting money control you.
TASK TO HELP YOU TRACK SPENDING
- Write down everything you spent your income on in the last month. This will give you good ideas of how you are spending money and help you identify areas to cut or increase.
- Review your bank statements from the last twelve months.
- Separate your findings into wants and needs. Limit your wants and prioritize your needs.
- Identify three to five things to cut each month that would make a significant impact. Review what you are spending on things like your phone calls and food because these are examples of things that are important but we tend to spend on mindlessly. Assess your spending in these areas and set spending limits.
- Spend on the things you love and cut expenses ruthlessly in the things that don’t matter to you.
Debt can be a useful tool to attain financial success but how you use it matters. Wealthy people use debt as a tool to leverage their investments and grow their cash flow, but poor people use debt to buy things that make rich people richer. Only borrow to acquire an asset that will appreciate in value. People with bad debt habits will typically go into debt buying things their income cannot support. They will borrow money to purchase big-ticket items that don’t appreciate in value and most likely can’t cover the cost of the debt over time.
HOW TO UNDERSTAND AND DEAL WITH YOUR DEBT
- Acknowledge the total amount of your debt by making a list of all of it.
- Set a repayment schedule that includes how much you owe each person or institution.
- Prioritize your debts. Decide which ones are most important. This depends on your particular situation—you could slay the largest debt first to give you more confidence that the rest are manageable, or you could decide it is best to start with the debt charged with the highest interest rate, so the debt does not increase. Otherwise, it’s best to pay the one with the most imminent issues.
- Set deadlines for each loan. There should be an estimate of how long it is going to take you to pay off each debt.
- Decide how you plan to raise the money to pay. For example, deciding to cut your outflow to create room in your budget every month towards paying down your debt, finding another source of income or selling off valuable items you don’t necessarily need are all options to consider.
- Think about the triggers that led you into debt in the first place and try to eliminate them. There’s no point getting out of debt only to dive back in.
Read Also: 7 Key Models Of Building Passive Income
BUILD AN EMERGENCY FUND
We live in a very superstitious society. So, even when we hear the terrible stories of people losing their jobs, or women losing the bread winners of their households suddenly, then forced into relative pennilessness because they can no longer afford their rent and have to beg friends and family for money to pay the children’s school fees or to solve one problem or the other, we think ‘God forbid not me’. Sometimes, though, bad things happen to good people. So instead of worrying without action, we need to plan for emergencies.
A smart person doesn’t wait for financial surprises; He or she systematically saves toward her emergency fund because she knows that this is the foundation of her financial journey. The cushion that acts as a financial safety net, so before you splurge make sure you have at least six to nine months of living expenses saved up for emergencies. An emergency fund is not there to make you money but to act as a financial cushion that protects your long term investments from short term unexpected expenses.
TASK TO GUILD YOU BUILDING AN EMERGENCY FUND
- Calculate how much you would need to survive if you lost your job or income from your business. What do your living expenses add up to each month? Multiply that by six or nine months. Factor in things like rent and utilities.
- Strictly define emergencies. Your car breaking down or having to pay an unexpected hospital bill qualify as emergencies. A phone upgrade, an impromptu trip to Dubai or those YSL pumps on sale do not.
- Shore up your emergency fund with windfalls like cash gifts, bonuses or extra work done. i.e. when you get money you were not expecting, commit to using a percentage (at least 20%) of it to top up your emergency fund.
4. Don’t put it in a risky asset class, i.e. stocks. It is not there to make you money.
5. The most important elements of an emergency fund are liquidity and safety, not return, so do not take risks to earn more or sacrifice liquidity.
6. Look for high interest savings accounts or money market accounts that preserve your capital and give you a reasonable return.
ARTICULATE THE VISION YOU WANT FOR YOUR LIFE
The most successful people are the ones who are able to articulate what they want for their lives. Success is deeply rooted in having a solid plan that is tailored to what you want.
HOW TO GET GOING IN ENVISIONING YOUR FUTURE
- Write down your vision statement. (What do you want your legacy to be?)
- What are your short-term goals? What ten things do you need to do to achieve them?
- What are your long-term goals? What ten things do you need to do to achieve them?
DEVELOP AND LEARN A SUSTAINABLE BUDGET
One of the biggest issues people complain about when it comes to their money is not knowing how to save or budget. People associate the word “budget” with scarcity or a reduction in station of life. Therefore, “budget” is a word they come to resent. The reality is, a budget is something that tells you how to allocate your resources and it should reflect what you value. So if I looked at your bank statement, would it reflect that you are spending on the things you love or would it be a reflection of the fact that you don’t spend intentionally and allow your money to be pulled in different directions?
The reason most people live paycheque to paycheque is because they don’t have a full understanding of what their income can support. Money in the bank is equal to spending. It doesn’t matter whether you earn ten thousand or ten million naira a month, your resources are limited and consumption tends to rise with income, so it’s important to have a spending plan that takes that into consideration.
So here is the trick for guilt-free spending: the smart money budget! I know the idea of a budget makes most people nervous, but it shouldn’t, especially if it’s easy and reflects the things you love. The smart money budget is a way of allocating your resources.
First, divide your income into three parts:
- Living expenses
- Long-term financial goals
- Short-term financial goals
Your monthly contribution to your rent, health insurance, cable/satellite television, petrol, service charge etc.
Long-term financial goals (LFG):
At a minimum of twenty percent of your income, it represents a proportion set aside towards improving your net worth, i.e. buying assets that will provide you with an income. Good examples are towards purchases like land, property or a stock portfolio.
Short-term financial goals (SFG):
The proportion of your income set aside for treats — a Chanel bag, an iPhone, or a luxury holiday; whatever tickles your fancy.
Here are two examples of how differing incomes might look distributing a salary.
Monthly income= $3,000,000
Living expenses (70%) = $2,100,000
LFG (20%) = $600,000
SFG (10%) = $300,000
Monthly income= $600, 000
Living expenses (70%) = $420,000
LFG (20%) = $120,000
SFG (10%) = $60,000
BUILD VALUE AND GROW YOUR NETWORK
- Evaluate your network. Who do you know? Who is in your circle of friends?
- Promote, demote, add and subtract. You are the CEO of your life, you shouldn’t be giving time to people or relationships that do not add value.
- What professional organizations do you belong to?
- How active are you in said organizations? It is one thing to be a member but another to be recognized as someone who adds value.
- Articulate and perfect your non-elevator pitch with practice, practice, practice.
In conclusion there are lots more to talk about but will stop here for now, with the tips and tasks listed above with persistence and being consistent no doubt you will gradually grow financially and build your income to a great wealth in the nearest future.
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