Have you recently lost your job and got a payoff? Did you just decide to retire ahead of time in exchange for severance or a compensation package? Whatever you decide to do with this money you are paid can make or mar you in the next few months.
Through the experiences of people who have squandered their severance packages and those who made very good use of it, we provide you a step by step guide of how and what to do when you get a huge pay-off.
Do not tell anyone
This is the hardest of all the rules and I doubt if anyone ever keeps it. However, the lesson here is that the less number of people you tell, the easier it is for you to achieve the goals I will list below. Human beings have ways of convincing one another to part with cash. It could be for compassionate reasons or new business ventures; in fact, reasons abound and I need not enumerate further.
Do not go into partnerships
It is not unexpected that you receive a flurry of requests for partnerships into new businesses when you receive a windfall. Even if they don’t approach you, you could be tempted to do the approaching. Suddenly you feel like you have arrived and are now ready to conquer. Partnerships hardly work and as a friend explained, it is the only ship that hardly sails. Now is not the time to go into partnerships.
Ignore pressure to donate to churches etc
A recently sacked employee told me that he planned to donate 10% of his disengagement benefits to his local church. Well, while this is a beautiful thought, I think it is the wrong thing to do. The church is there to help you at this moment and not take from you, considering that you face an uncertain future. You can continue to give your offerings but please, no more than that.
Have emergency funds
Put aside an equivalent of your most recent 3- 6 months’ salary, depending on how much your pay-off is. If it is more than twice your annual salary, then put away your most recent full year salary. If it is less than that but more than your annual salary, then put aside your six months’ salary.
Reason: By putting away a significant portion of your severance pay, you are sure of paying your important bills and putting food on the table while you search for a regular source of income.
Note: Your emergency funds should remain the same even after you get a job. Make it a habit.
Put some money away in your pension fund account
Now you have between 75% to 50% of your pay-off left, assuming you have no debt. For ease of understanding, I will assume that 50% is what is left. The next thing you should do is add another 10% of your pay-off to a pension fund account that you have always contributed to. Employees in Nigeria are expected to contribute 7.5% of their Basic, Housing and Salary in a pension fund. The amount is also matched by their employers.
Reason: Basic, Housing & Transport allowances typically make up 60% of staff salaries in Nigeria. Since employees and employers contribute 8% and 10% respectively (that is 18% in total) pension contribution is therefore about 10% of your salary every month or per annum. So, by keeping aside 10% of your annual salary, you have at least saved your full year’s pension contribution (yours plus that contributed by your former employer).
Note: Contribute 10% of your annual salary if your pay-off is at least up to your annual salary. If it is less, then keep aside 1% – 5%, depending on how much you have received. For people who are over 50 or have attained retirement age statutorily or by choice, you do not need to put this money aside because you will already be entitled to some of your pension contributions.
Pay your debt
Debts are bad and could be a clog in the wheel of progress. You should make efforts here to pay off lingering debts. If you cannot pay all your debts, then make sure you pay off debts that might stop you from getting services you can’t do without or those that come with severe penalties or cost.
Save and invest
You are now left with about 40% of your severance, assuming you have no debt. It is likely that at this point, starting out a business might seem enticing. That is understandable. However, people often forget the risks involved and don’t even bother to carry out proper feasibility studies on the business. Make sure you learn how feasible a potential business is by understanding the risks in it, the value chain, market, challenges, competition, etc. If you feel business is not the way, then you can consider investing. However, avoid Ponzi schemes, as they can be highly risky.
Government securities: Invest the balance 40% of the money in Treasury Bills or FGN Bonds. These money instruments pay a handsome 12 –14% interest per annum. They are also very safe and guaranteed by the government. The fact that banks, pension funds and others that we consider investment gurus prefer them to even stock helps buttress the argument.
NEVER GIVE YOUR PAY-OFFS TO PEOPLE WHO DON’T GIVE YOU 99% GUARANTY THAT YOUR MONEY WILL RETURN AS IS. You can invest in stocks, mutual funds, fixed deposits with any other source of income.
Invest in income yielding real estate: If the balance 40% is huge enough to buy you a real estate property without needing to borrow, then I will suggest you buy it, provided it is one that earns you rental income. I had a friend who once spent N15 million out of a N50 million windfall he received building a mansion in his village. When he went broke, the mansion ended up being the most difficult thing to sell. No one was interested in buying it even for N1million.
Invest in yourself: It is also good to invest in your dreams and desires, provided you have the courage and have thoroughly conducted a proper feasibility survey. I would suggest that you do not spend more than 20% of whatever is left to start a business. If the business costs more, then you are probably not ready for it in terms of funding. You should concentrate more on getting your funding in place rather than starting out a business without the necessary funding required. The 20% should be enough for you to at least start without borrowing from anyone.
Look for a Job
For those who are not looking to start a business anytime soon, now is no time to rest. Be aggressive and look for a job as quickly as you can. This is also no time to be selective. Take the job that fits your minimum requirement and move on. You will need that extra income soon enough.
This article was first published on Nairametrics on December 21, 2016.
DEVALUATION: CBN updates website to official rate of N360/$1
The central bank of Nigeria has devalued its official exchange rate from N307/$1 to N360/$1.
Just as Nairametrics reported, the Central Bank of Nigeria has devalued its official exchange rate from N307/$1 to N360/$1. The apex bank has now reflected this change on its website signaling a confirmation. The bank is yet to issue a press release to this effect.
The CBN has now officially devalued by 15% moving from N307/$1 to N360/$1. Depreciation at the “market-determined” I&E window is 5% having moved from N360/$1 to N380/$1
Devaluation: Nairametrics reported yesterday that the Central Bank of Nigeria (CBN) sold dollars to banks at N380/$1 in a move signifying a devaluation of the currency. Banks trading at the Investor and Exporter (I&E) window bought dollars at N360/$1 from the CBN on Friday, March 20, 2020. The I&E window is the official market where forex is traded between banks, the CBN, foreign investors, and businesses. The central bank typically buys or sells in the market as part of its intervention program.
Nairametrics also got hold of a letter from the CBN to banks informing them of the new exchange rate for dollars flowing from the International Money Transfer Operators (IMTOs). According to the CBN, IMTOs will sell to banks at N376/$1 while banks will sell to the CBN at N377/$1. The CBN will sell to BDC’s at N378/$1 while the BDC’s will sell to end-users at “no more than” N380/$1.
Single Exchange Rate: A report yesterday also suggested that the CBN also planned to move to a single exchange rate policy for determining the price of the dollar. A senior central bank official who does not want to be identified, said, ‘Today we allowed the rate at the importer and exporters (I&E) window to adjust in response to market developments.’
The central bank has now made an apparent u-turn after it had initially that the “market fundamentals do not support naira devaluation at this time” detailing reasons why it did not need to devalue.
Falling oil price: Oil prices fell to under $20 on Friday before climbing back up to settle at $23 per barrel. Nigeria’s Bonny light trades at $26 while the benchmark Brent crude trades at $29 per barrel. In response to the crash in oil price, Nigeria’s announced a cut to its 2020 budget by N1.5 trillion as it faced the reality of a potential drop in its revenues. Nairametrics also has information that state governments are getting jittery about their ability to sustain salary payments as a reduction in their federal allocation “FAAC” is anticipated.
Investment options for salary earners
Investment options for the salary earners
#Investing #Entrepreneurs #Investment #Salary #Wages
Recently, one of the readers of my articles asked to know what investment options are open to salary earners. A salaried individual is like everyone else except that he or she has a fixed monthly income. This implies that their investments and expenses have to be managed strictly according to their fixed monthly income.
Since salary is assumed to be the only source of income for the salaried, it is advisable that such an individual fortify himself financially before investing so that adverse investment performance will not have untold effect on him and his family. Therefore, if you are a salaried prospective investor, you need to:
Get life insurance
Most families in Nigeria are single income families so much such that if anything bad happens to the income earner, the family gets shattered, at least financially. Again, given the risks inherent in capital market investments, it is only prudent to have a life insurance as a first step in one’s investment journey. It is very baffling to see many investors very deep into the market, yet they do not have life insurance.
[Read Also: Understanding the risks in bond investing]
Life insurance is and should be a basic part of any financial plan. Life insurance is a protection for loved ones against financial hardship arising from the death of a breadwinner. This is even more important today than ever before with high cost of funeral expenses, college education and medical bills. So, the first investment option for a salaried individual is to get a life insurance.
Prepare for financial emergencies
Life is full of surprises, emergencies do happen, jobs are lost without notices, and even good investment opportunities emerge sometimes suddenly. There is, therefore, the need for a cash reserve to help weather the financial storms and emergencies when they come calling.
Cash reserves do not only provide for emergencies, they also help to ensure that investments are not liquidated prematurely or at inopportune times to cover unexpected expenses. There are no hard and fast rules on what the exact amount of the required cash reserve should be, but most financial experts and planners will advise that an amount that equals about six months of living expenses be set aside.
So, as a salaried person, your next investment should be to have a cash reserve. A cash reserve should not necessarily be in a savings account or under the mattress; it could be in an interest-bearing money market account, money market mutual funds with low to zero luck-up period or another form of very liquid investment that is readily convertible to cash without loss of value.
[Read Also: Understanding the risks in bond investing]
Know your risk appetite
As a salaried and fixed income individual, your risk appetite is most likely going to be low as well as your risk tolerance, although your extended family profile could change all that. You need to know or understand your risk tolerance before you engage in any capital market investment.
Your risk tolerance will and should drive the type of investments you go into. Your risk tolerance depends on your psychological makeup, your current insurance coverage, presence or absence of cash reserve, family situation, and your age among others.
Talking about family situation, it is reasonable to think that a married individual whose children are still in school will be more risk averse than an unmarried person. On the other hand, older people have shorter investment time horizon within which to make up for any losses. the reason for this is because the older you get the less time you have to work to recoup on losses.
In that case the risk tolerance of an older man will be less than those for younger folks. Again, the more cash reserve and insurance coverage you have, the more your propensity to take risk. Now having known your risk tolerance based on the underlying factors, you can then define your investment objectives
[Read Also: Important tips on how to profit in a bearish market]
Set your Investment objectives/goals
Having met those essentials above, you are now ready for a serious investment plan or program. A good investment plan starts with investment objectives. Investment objectives are the force that determines what you invest in. Investment objectives range from capital preservation, to capital appreciation and constant income generation.
Capital preservation as an investment objective implies that you, the investor, aim at minimising the risk of loss by maintaining the purchasing power of your investment. So, if you are risk averse or you will need money from your investment soon for children’s education or for building a house or you are nearing retirement, this should be your objective.
Investors whose aims are to see their investment portfolios increase in real terms over a period of time are better suited for capital appreciation as an objective. This is better for investors that are more risk tolerant and those with more potential to recoup on losses along the way.
If you are already retired or nearing retirement, and therefore depend on your retirement plan supplemented by investment income, you need an investment that generates income rather than capital gains. In that case, your investment objective should be current income generation. It is always good to have investment goals stated in terms of risk and returns.
Decide on asset allocation
Armed with the knowledge of your risk appetite and investment objective, you are now ready to decide on what to invest in, and how much to invest in any asset class. This takes you to asset allocation decisions. Asset allocation involves dividing an investment portfolio among different asset classes based on an investor’s financial requirements, investment objectives and risk tolerance.
A right mix of asset classes in a portfolio provides an investor with the highest probability of meeting his/her investment objectives. Asset allocation is the most important investment decision an investor can make in a portfolio because it demonstrates an investor’s understanding of his or her risk preferences and return expectations.
It is good to strive for a diversified portfolio. Unfortunately, the Nigerian market does not provide a lot of asset classes for optimal diversification, but diversification can be achieved across sectors or industries within the few asset classes in the Nigerian stock market.
Decide on how to invest
There are different ways to invest in the capital market. You can invest directly by making the stock selections by yourself, thanks to the online stock trading platforms that abound the world over. This implies that you have what it takes to conduct the required research and analysis of the companies whose shares or stocks you wish to buy.
[Read Also: How I Would Invest My Mother’s Retirement Funds]
It also implies that you have what it takes to know when to sell or add to existing positions. Another method is to have someone “do the heavy lifting” for you. In this case, that someone, often times called fund manager or portfolio manager, does the research and analysis and selects shares that suit your investment preferences, investment objectives, risk tolerance and appetite as well as your investment time horizon.
This route is most suitable for investors that lack the knowledge and time for the required research and analysis. If you decide to go this route, mutual funds are the best bet for you.
Atiku kicks as Buhari spends $3.7 billion in foreign debt service since 2015
The Buhari led government has spent about $3.7 billion in foreign debt service since 2015, one of the highest from any democratically elected government. The highest single-year foreign debt service was in 2006 at $1.79 billion.
About 68% of Nigeria’s foreign-denominated debt servicing is in commercial Eurobonds issues over the last two years. The loans range between 5.1% and 9.2% per annum. Nigeria’s external debt stock stood at $27 billion in June 2019.
Rising debt service: The Buhari administration has so far spent about $1.1 billion in foreign debt service this year. In 2018, the government spent about $1.4 billion in debt service, more than 3 times the $444 million it spent servicing foreign debts in 2017. The rising cost of debt service is a direct attribute of the government’s reliance on foreign loans as a means of funding government expenditure.
Foreign Loans: Nigeria’s fallen revenue following the crash in oil price has allowed President Buhari to rely mainly on foreign loans to fund government expenditure. As of June 2015, Nigeria’s foreign loans were about $10.5 billion mostly made up of multilateral and bilateral loans.
However, by June 2019, total foreign-denominated loans were $27 billion with $10.8 billion made up of Eurobonds. Commercial loans which include Eurobonds and Diaspora bonds make now make up about 42% of total foreign borrowings.
Critics of the government have complained about the government penchant for debts believing that it could put the future of younger Nigerians in jeopardy. Supporters of the government, however, believe the borrowing was necessary to invest in critical sectors of the economy particularly infrastructure.
Recently, Director-General of MAN, Segun Ajayi-Kadir expressed worry about Nigeria’s rising debt.
“….the rising debt profile of Nigeria continues to be a cause for concern, especially the capacity of government to effectively service it and, at the same time, meet the bursting needs and aspiration of the citizenry going forward.”
“Already, our budget projections for 2020 anticipates a debt service sum of 2.45trillion, an amount higher than the 2.14 trillion earmarked for capital expenditure.
“And even though our debt-to-Gross Domestic Product (GDP) ratio, which currently stands at 28 percent, is still below the average in Africa, our revenue-to-GDP ratio remains low.”
The Finance Minister Zainab Ahmed however, believes the current debt profile is sustainable, comparing it to our GDP.
“Currently, Nigeria’s debt is at N25 trillion; that is about $83 billion. And at $83 billion, we are just at 18.99%…so 19% debt to GDP. I hear people say Nigeria has a debt problem. We don’t have a debt problem. What we have is a revenue challenge and the whole of this government is currently working on how to enhance our revenues, to ensure that we meet our obligation to service government as well as to service debt.”
Former Vice President and defeated PDP Presidential aspirant, Atiku Abubakar during the week piled criticism on the government’s borrowing.
“I have said it time and again. The business of government is too serious to be left in the hands of politicians. We must all ask questions because if they throw away the future, it is not going to be their future they are throwing away, it will be all our futures.
“The fact that Nigeria currently budgets more money for debt servicing (N2.7 trillion), than we do on capital expenditure (N2.4 trillion) is already an indicator that we have borrowed more money than we can afford to borrow. And the thing is that debt servicing is not debt repayment. Debt servicing just means that we are paying the barest minimum allowable by our creditors.
What this means: Nigeria’s rising foreign debt profile should be a worry to investors and businesses and must be watched closely. The country’s ability to repay these loans will continue to be harder as it increases especially now that it is costing about 9%. The immediate risk for investors is the exchange rate which could be the first to suffer should the government struggle to repay its loans.