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How to calculate your taxes using PAYE

Salary Earner? How to calculate your taxes using PAYE



minimum wage in Nigeria, How to save money in 2019, ATM, NIP, NBS, CBN, Inflation, Interest Rates

Salary earners in Nigeria are mandated by law to pay tax under the Pay As You Earn (PAYE) scheme. Every month a portion of your salary is deducted as tax leaving you with a net salary to take home.

Taxes under the PAYE scheme fall under the jurisdiction of the State Inland Revenue Service, meaning that all the taxed you pay are remitted to the state of your residence.

For example, if you live in Ogun State but work in Lagos, you are liable to pay tax to Ogun State and not Lagos State.

Nigerian Personal Income Tax Laws have evolved over the years with several amendments introduced to align with the income of Nigerians. The latest amendment was in 2012 when the Goodluck Jonathan Administration signed into law an Amended Personal Income Tax Act, replacing several controversial sections of the act with a simpler and easy to calculate taxable income.

The new amendments affect several sections of the Personal Income Tax Act, particularly Section 33 which deals with Personal Relief and Relief for Children, dependants, etc. This has now being replaced with a Consolidated Relief Allowance (CRA) of N200,000 + 20% of gross income.

They have also reviewed the Minimum Tax upwards from 0.5% to 1% and the Tax Table has also been notably amended.

In this article, we will demonstrate how your personal income tax is calculated using the example of a taxpayer named Mr Ahmed.

How to calculate your tax payable

Mr Ahmed earns an Annual Salary Package of N3 million including leave allowance. Mr Ahmed also contributes 2.5% of his basic to the National Housing Fund to enable him to secure a loan.

[Read Also: Does one’s fat salary automatically guarantee wealth?]

Let’s take you through these steps to calculate his taxable income:

(Remember CRA replaces all reliefs including transport, leave allowance, rents etc.)

Step 1:

For tax purposes we can break-down his salary as follows:

Step 2:

Following which we can now apply the Consolidated Relief of N200,000 plus 20% of Earned Income and also deduct exceptions such as National Housing Fund Contribution (NHF) which is 2.5% of your Basic and also Pension which is 8% of your Basic+Housing+Transport to arrive at your Taxable Income; Please see below:

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Step 3:

Mr Ahmed will now be taxed on N1,986,538.35 using the new tax table.


From the table above, Mr Ahmed will expect an annual tax deduction of N305,173.05 or a monthly tax deduction of N25,431.09. This is a 10.17% effective tax rate for Ahmed. And this is what his take home will look like:

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[Read Also: Strategies to Reduce Expenses and Save Money]

The amended law makes it very easy to calculate income taxes unlike before, thus eliminating most of the loopholes that were previously being used to exploit taxpayers.

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But how can I reduce my taxable income?

The new PAYE template introduced in 2012 makes it more difficult to reduce the amount of taxable income you are subjected to. However, there are still something you can do to reduce your taxable income.


To encourage pension contribution the Government allows employees to contribute more than 8% of your basic, housing, and transport as a pension contribution. By doing so, you get more tax reliefs, thus lower taxable income. Using the example above, assuming you decide to increase your pension contribution from 8% to 10%, your monthly taxes reduce to N24,623 as depicted below:

It is important to note that by doing this your take-home pay will reduce as your salary will be deducted for the extra pension that you contribute. However, you get compensated for this by the extra return you earn on your pension contributions as well as paying lower taxes. Also, assuming you decide to resign and cash in on your pension within 5 years of contributing it, the new pension reform act of 2014 requires that the additional portion contributed will be taxed. Therefore, you will also have to have contributed it for a period of over 5 years to get a tax rebate.


[Read Also: DMO to auction fresh N145 billion bonds for subscription]

Life Assurance

Life Assurance premiums are those premiums you pay towards insuring an immediate family member in the event that you die. There is no limit to how much you can contribute and how much relief you can get from it. The higher your life assurance, the higher the relief that you get. Assuming Mr Ahmed paid a premium of N500,000 in life assurance during the year and also contributes 10% as pension, His taxes will look like this:

You can see that the tax per month has dropped to N16,139 as against N24,623 when he didn’t pay premiums on life assurance. Just like the increase in pension contribution, this also dents your take home but you get the benefit similarly.

Below is a simple template to help calculate your taxes by yourself. Send us an email or drop a comment if you have issues using it. Help us to help you.

Download (XLSX, 25KB)

This article was first published on Ugometrics (Nairametrics) in 2012 and was later updated in 2019.

Nairametrics is Nigeria's top business news and financial analysis website. We focus on providing resources that help small businesses and retail investors make better investing decisions. Nairametrics is updated daily by a team of professionals. Post updated as "Nairametrics" are published by our Editorial Board.



  1. Ralph

    June 19, 2012 at 5:13 am

    Can you please confirm if there has been a change in the template since the recent amendment in June. Cheers.

    • ugodre

      June 19, 2012 at 2:43 pm

      No changes has been made. The template is fine. Thanks

    • Richard Tsinigo

      February 23, 2017 at 3:32 pm

      Please assuming some one is earning #1000000 (one million Naira ) per month. How much suppose to be his tax, paye per month.?

  2. osh

    November 10, 2012 at 11:16 pm

    Am having issues with this tax issue deduction. Was trying to figure something out but looks complicated…if i may ask, someone who has an annual gross pay of 4026000…how much is meant to be deducted for PAYE and contributory pension monthly? I’ll L?k to get the answer in my email addy…thanks in advance

  3. 676157419

    November 20, 2012 at 2:58 pm

    Thanks so much.

  4. abubakar

    January 3, 2014 at 11:04 am

    please kindly send me these new amended personal income tax template in my E-mail thanks

  5. Monisoye Ponle

    January 21, 2014 at 10:30 am

    please kindly send me these new amended personal income tax template in my E-mail above


    April 22, 2014 at 11:38 am

    Please send a computation of tax relief on INSURANCE PREMIUM.



    March 11, 2015 at 12:34 pm


    • John Chiokwe

      March 20, 2015 at 3:13 pm

      This is dependent on what your allowed amount is and your gross pay. Is either 1% of gross pay or (Gross Pay – 200000 -20% of Gross Pay- Other Reliefs) subjected to tax calculator – the one that is higher is used.

  8. Festus Gbenga

    June 3, 2015 at 11:32 am

    Please kindly send into my email box; the current copy(2015) of the Annual return form for PAYE tax IN Nigeria.

  9. abyurla

    July 27, 2015 at 10:57 am

    oh seen. was looking for this earlier
    thank you

  10. KarugaEdwin

    October 17, 2015 at 10:32 am

    Try out this Nigeria income tax calculator: Should help clear things up!

  11. onyenehido chinwe

    October 28, 2015 at 9:24 am


  12. Anonymous

    November 5, 2015 at 9:03 am

    For those not earning up to N300,000 how would the tax be calculated?

    • Anonymous

      May 31, 2018 at 12:43 pm

      300,000 is annually , 25,000 monthly

  13. Oluwafemi Akinyede

    November 5, 2015 at 9:04 am


  14. Oluwafemi Akinyede

    November 5, 2015 at 9:06 am

    And for those whose taxable income is negative, how would their tax be calculated?

    • Anonymous

      August 17, 2018 at 5:35 pm

      minimum tax applies. 1% of gross income

  15. Betty

    March 3, 2016 at 1:02 pm

    Thanks, very informative article, please do you sometimes give lectures as relates to taxation and other related concepts as it applies to the workforce.

  16. Kwande Dawal

    March 23, 2016 at 5:58 pm

    Great and educative article. Thanks

  17. Austin Jose

    April 8, 2016 at 10:39 am

    The part of Exemptions, the pension, I thought it is 8% of B+H+T and not 2.5%. Am I missing anything there?


      September 8, 2016 at 3:52 pm

      Am also confuse on the part of Pension . I also thought it is 8% of B + H +T and not 2.5%

  18. abosede ajayi

    April 14, 2016 at 9:27 am

    Please for those that does not earn up to 300000 annually. e.g 240000, how much am I paying.

    • Okonkwo valentine

      December 12, 2016 at 2:14 pm

      What should those earning less than 300000 pay as tax

  19. Michael

    May 5, 2016 at 10:52 am

    Interesting and educative write up.

  20. Edor Sunday Fidelis

    June 29, 2016 at 5:40 pm

    kindly send the template to my mail sir/madam

  21. Muyiwa

    August 22, 2016 at 12:54 pm


    September 8, 2016 at 3:56 pm

    The pension Contribution exemption should be 8% of B+H+T. Please throw more light on this.


    September 8, 2016 at 4:00 pm

    IS There a lay down yardstick for determining what percentage goes to basic, housing, transport, utility and others? or is just base on individual assumptions

    • Nairametrics

      September 8, 2016 at 4:11 pm

      No yardstick

  24. Adefemi Dada

    September 28, 2016 at 5:19 pm

    Kindly send me the new PAYE template to my E-Mail Box below, thanks

  25. Folake

    November 11, 2016 at 5:35 pm

    Thanks for the info. You make it easy to compute.

  26. Anonymous

    November 14, 2016 at 9:54 am

    can I get tax relief for having a life insurance cover

    • Nairametrics

      November 14, 2016 at 10:37 am

      Yes you can.

  27. Digital Marketing Agency Lagos

    November 24, 2016 at 10:07 pm

    Thanks for sharing. Do you have this in any spreadsheet all pre-calculated?

  28. Anonymous

    December 9, 2016 at 9:42 am

    Pension is 8% of total emolument based on the pension reform act 2014

  29. Chido

    January 8, 2017 at 8:47 am

    Hello. On the taxable income calculation, the template seems to be calculating the LAST 300,000 first before the first 300,000; contrary to what you have on this page. For instance, on a taxable in come of 400,000, I noticed that the template uses 100,000 on 7% and the next 300,0000 on 11% instead of 300,000 on 7% and 100,000 on 11%.

    Is it an error? Please clarify.

    • Nairametrics

      January 8, 2017 at 3:56 pm

      Thanks for your comments. Our team is having a look at it.

      • Chido

        January 19, 2017 at 3:37 pm

        Any feedback on this yet? Kindly reply

  30. adminwole

    January 10, 2017 at 1:58 pm

    Highly educative post. Thank you for sharing about managing PAYE.


    January 17, 2017 at 11:53 am


    • Nairametrics

      January 18, 2017 at 6:19 am

      No standard rate…just your assumption


    January 17, 2017 at 12:43 pm

    please i need answers

  33. Constant earnings

    January 18, 2017 at 9:00 am

    For someone that is earning N360,000 how will the computation be done using the template given cos am arriving at a negative figure.

  34. Victor C

    January 27, 2017 at 1:18 pm

    I see the salary is broken down on your excel sheet .
    Do you have a sheet that actually works for consolidated wages ?

    Also some employers pay the 18% pension contribution for their employees . In this case the person is left with only VC -voluntary contributions as per tax laws. Does your sheet account for this contribution ?and how much tax does it reduce by if it does . Thanks

    • Nairametrics

      January 27, 2017 at 1:30 pm

      Hi..the sheet addresses all your questions. You don’t have to stick to the breakdown.


    January 27, 2017 at 1:53 pm

    i earn 200,000 monthly,and my firm has not registered with pension fund and national housing fund. so,basically we dont have any relief yet. what would be my tax.

  36. Melissa

    February 1, 2017 at 5:55 pm

    Thank you for this post. It has helped me a great deal. Though i know absolutely nothing about taxes [the part that has 1st 300,000 next 300,000 is greek to me!!]
    But using the table i can input the figures i have and get the tax needed. Do you have any idea at all how i can construct a basic payroll sheet? You’re free to laugh before replying.
    Thank you

  37. jide funsho

    February 6, 2017 at 11:34 am

    Pls for those earnijg 264, 000

  38. ibrahim

    February 28, 2017 at 5:07 pm

    How do one calculate capital relief allowance pro rata?

  39. shegs

    March 7, 2017 at 2:56 pm

    what about loo earner like 70k

  40. Anonymous

    March 16, 2017 at 1:34 pm

    Hello Nairametrics, I am quite confused on how to calculate the proportion of the income that accrues to each section like basic, transport etc. For basic 38.5% of 3000000 should be 1155000 but it is 1153847.20 up there … I would be glad if you reply me in alacrity as my exam is nex week and my professor is making use of this template. Thanks in anticipation. Best Regards

    • Nairametrics

      March 16, 2017 at 9:52 pm

      You do not need to follow that proportion. Just distribute your salaries in whatever proportion you desire

      • Anonymous

        October 2, 2019 at 10:26 am

        good morning sir/ma
        Pls can you send me the new template for the tax system in Nigeria.
        My emails address is [email protected]
        Thanks a lot.

  41. Anonymous

    March 28, 2017 at 3:20 am

    Thanks a lot Nairametrics. I found this very useful

  42. Annonymous

    March 29, 2017 at 6:11 pm

    Hello, great article. I however noted that you did not discuss NHIS and gratuity as tax reliefs. Can you please shed more light on this and possibly amend the template to include these two elements?

  43. Anonymous

    April 3, 2017 at 1:41 pm

    Hello Nairametrics, i found your post very informative and helpful. I want to know if performance bonuses, that are based on the employer’s appraisal of performance, are taxable. Thank you.

  44. IBK

    April 5, 2017 at 12:52 pm




  45. Owobu Mercy

    April 10, 2017 at 12:58 pm

    Hello , nice work. i noticed there was nothing about NHIS please throw more light on that aspect and the #200,000 that was added to the consolidated relief, how come about it? Thank you

  46. Marian Oko

    April 10, 2017 at 1:17 pm

    What is the percentage for calculating personal income tax, for people earning from 100,000 to 360,000 per annum and 480,000 to 720,000.

  47. Jackie

    May 3, 2017 at 10:58 am

    Please what is the process to start remitting taxes for a company that has not being remitting taxes for its staff.

  48. Babajide Owoniya

    July 7, 2017 at 9:03 pm

    What about tax template about self employed person.

  49. disu moshood olamide

    August 4, 2017 at 3:06 pm

    Please i earn #35,000 monthly how much is my monthly payee meant to be

  50. Anonymous

    August 23, 2017 at 10:43 am

    Fantastically helpful!

  51. Vina

    August 26, 2017 at 6:04 pm

    This is a real eye opener. Just two more questions:
    1. Do effective tax rate change per person, within a year if there is no salary adjustment?
    2. How are bonuses (such as overtime bonuses, performance bonuses) taxed as this bonuses are not regular and do no not span through the year?

  52. Toluwase

    November 2, 2017 at 11:14 pm

    Please i want to know how to know the percentage applicable for various amount of salary. You send the response to my email address

  53. Francis

    November 7, 2017 at 12:24 pm

    Hello Nairametrics. Good article here. However please note that relief for children and dependent relatives were not removed in the amended PITA 2011. Though not very significant at N10,000 and N4,000 respectively, they still form part of the total exempted income for employees along with CRA, NHF and Pension.

  54. Obinna

    November 15, 2017 at 2:39 pm

    I do I calculate the effective tax rate

  55. Et

    November 16, 2017 at 12:17 pm

    How do I calculate tax rate on Xmas bonus

  56. Mimi

    December 4, 2017 at 3:57 pm

    Thank you so much for taking your time with this article, it has been really enlightening for me. Please permit me to ask a few questions (P.S; I am illiterate about taxes and all such subjects with just an idea about basic accounting and finance)
    I have downloaded the template as is and tried to input relevant amount and while it mostly correlates, it doesn’t take into account employer pension contribution and national health insurance which are apparently deducted from my gross pay, also i noticed NHF is not deducted from my salary. How does the template apply to me in such a case.
    Help my noviceness please.
    Once again, please know that i appreciate all you do here and on twitter to educate people like me.


  57. Anonymous

    December 19, 2017 at 2:20 pm

    This is great. I Appreciate

  58. Olugbenga

    December 26, 2017 at 3:05 pm

    This is great article and highly educative.

    Thanks for your time

  59. Amalu

    January 9, 2018 at 1:20 pm

    Please to which office or agency does this PAYE goes to.

    Because you can’t be deducted without having records

    I’ve be taxed for years but I don’t have tax payment evidence.

    I need evidence of this payment. so to whom do I report for this evidence after been taxed

    • Nairametrics

      January 10, 2018 at 12:53 am

      The state inland revenue service

  60. p

    January 14, 2018 at 10:55 pm

    how do one calculate hourly or weekly t or biweekly tax,

  61. Teewhy

    February 23, 2018 at 2:17 pm

    Please for a staff that has a life insurance policy, what documents must he/she submit to the accountant before the premium paid can be treated as a relief to arrive at the net pay.

  62. Kelechi osuji

    February 25, 2018 at 4:32 am

    I would like to mail you my salary details so that I can be sure of the tax am paying

  63. Kimmy

    May 2, 2018 at 6:01 pm

    This is so insightful, detailed and explanatory kudos to nairametrics

  64. Kimmy

    May 2, 2018 at 7:23 pm

    I would also like you to further explain the 1st 300,000 the next, next till you got the figure 305173.05 in charging the PAYE tax rate

  65. Ilesanmi

    May 15, 2018 at 4:47 pm

    Thank you sir for the templates but I need to clarify issues on overtime and call back it taxable and if yes what percentage.

  66. Moses Olusegun

    June 6, 2018 at 6:10 pm

    Good info and I praise you guys.

    If so be how come am I paying 35k to 40k monthly and my take home is no more than 300k

    Also for the passed 9 years nothing like tax relief paid to us in TICT.

  67. Rasheed

    July 9, 2018 at 2:06 pm

    How can one calculate his P.A.Y..E if the salary is just #30k per month with no other allowance (a contract staff)?

    • Anitwest

      July 21, 2018 at 12:26 am

      30k is 360,000 per annum
      20% gross is=72,000, Consolidation is= 200,000, when u deduct These amouta from the gross, u will be left with taxable income of =88,000

      Note. Since the taxable income is below 300,000
      Then the paye will be= 88,000 x 7%=6,160 per annum, for monthly paye divide it by 12

      • Whyt

        October 1, 2018 at 12:09 pm

        I thought since the taxable income is N88,000 which is less than N300,000, 1% will apply on the gross?

    • Anonymous

      July 21, 2018 at 1:23 pm


      This is a comprehensive analysis.

      Thank you.

  68. Anitwest

    July 21, 2018 at 12:16 am

    To my best understanding, If ur gross salary is not up to 300,000 per annum, then the paye is 1% of the gross salary, but if ur gross salary exceeds 300,000 and above and after deduction of relief, and taxable income left is below 300,000, the Paye should just 7%.of the taxable income

    But note: if after deducting the tax relied relief and the taxable income exceed 300,000 then u need to apply the formulas

    1st. 300,000 7,%
    Next .300,000 10%
    Next. 500,000 11%
    Next 500,000 19%

  69. Tony

    July 21, 2018 at 2:16 am

    For #60,000 monthly salary, what I will be the tax

    • Anitwest

      July 21, 2018 at 7:30 pm

      60k=720,000 per annum, 20% gross= 144,000, CR=200,000. So the taxable income is =720,000 -144,000 -200,000 =376,000
      Note, the Taxable income above does not include pension . And also since the taxable income is 300k and above, then apply the tax fomular.

      Taxable income = 376, 000.
      1st 300,000 x 7% = 21,000
      Next 76,000 x 11% = 8,360
      Adding up =. 29,360 per
      annum for monthly divide it by 12
      It will give u ur monthly Paye value

      • Ubani O Gloria

        October 24, 2018 at 10:16 am

        Thanks you just made it easy.

  70. Anonymous

    August 14, 2018 at 4:25 pm

    what about if there is an overtime, how do we compute the tax for it


    September 27, 2018 at 12:26 pm

    Thanks for al the contributions. They’ve been quite educative.

  72. Bassey

    May 3, 2019 at 4:22 am

    I have been using this formula for quite a while. Thank you so much nairametrics.
    My challenge now is this. For someone that his salary net for the year is 2,640,000 that is 220,000 per month net that is PAYE and pension deduction not included. How much will be calculated that is added to this amount for the payment of PAYE and pension.

  73. Anonymous

    July 28, 2019 at 11:13 pm

    Please can you expatiate on the Life Assurance. How does an employee take credit for it? I have had issues where an employer says the LIRS officials don’t accept Life Assurance certificate for a tax cut.

  74. Mozelle

    August 8, 2019 at 9:28 am

    We advocate the primary tune titled AFRO – DANZA KUDURO.

  75. Teingo Inko-Tariah

    September 26, 2019 at 7:54 am

    Useful illustration. However, it would have been better for the tax rate to be clearly stated before the demonstration of how to compute using the tax rate or formula is done. The illustration doesn’t address every level of annual income and cannot be expected to do so. Therefore, the rate should be clear.

    First N300,000 at 7% …etc so that anyone can do the computation after relief has been deducted.

  76. Anonymous

    September 29, 2019 at 7:32 am

    Comment: please help me calculate my monthly PAYE. have done the calculation but not sure. My monthly pay is #35,000

    • Nairametrics

      September 29, 2019 at 9:39 am

      Log into here. Look for tax calculator and get your taxes

  77. Jacobs

    March 27, 2020 at 4:02 pm

    Thanks. Very informative.

  78. Peter Odudu

    April 27, 2020 at 5:15 pm

    Thanks for educating me. Why is Taxable income below 300,000 is calculating using 7% and not 1%. Thanks.

  79. Peter Odudu

    April 27, 2020 at 10:32 pm

    Thanks, when Calculating Annual Tax using a taxable income below 300,000, why using 7% instead of 1%. Thanks.

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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.



CBN website states oil price is still $61, Naira under pressure as Nigeria records poor export earnings, 4 key sectors the CBN plans to pump money into

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.

The CBN has updated its website with the official exchange rate.

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.

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Career tips

Investment options for salary earners

Investment options for the salary earners
#Investing #Entrepreneurs #Investment #Salary #Wages



Investment options for salary earners - bank loan

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:

READ: Where to invest N500,000 right now

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.

READ: SEC issues pre-notice on cancellation of certificates of 157 inactive CMOs

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.

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READ: Here’s what will happen to Nigeria’s insurance sector in the short to medium term


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

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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.

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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.

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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.

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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.

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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.

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