How should you start your investment journey? What comes first? Is personal finance an itemized list? The answer is in the affirmative.
Personal Finance is about planning, keeping to that plan, and adjusting if necessary, to meet a predetermined financial goal. Whilst no one can predict the future, we can plan for it, and hedge against unforeseen circumstances.
So let’s use a couple – Mr and Mrs James as a guide. They are married, both employed and have a 2-year-old daughter Hawa, and they want to plan for their financial future. What are the steps? What should they/you do first?
First, do an internal audit of your present financial situation, write down your income. Income can be passive or active. Write down expenses, expenses can be one-off or recurring. Next, write down assets and liabilities; assets can be income-generating or non-income generating. Liabilities can be interest bearing or non-interest bearing.
What is important is to have this information, you don’t have to analyze it; just have the information as complete as possible, with dates, interest rate earned or charged. These are the source documents the financial planner will use going forward.
[READ MORE: Is investing in commodities only for the brave?]
So key deliverable from you at this stage is your Statement of Networth which has your income/expenses/asset/liabilities.
Next, get advice; get a financial planner. This can be a human or even artificial intelligence robot advisers like the Betterment®. Your adviser will take your cash flow and asset statement you have done and add new information including:
- Your investment objective: Why are you making this plan? Retire well? Save for school for child? Short term returns? Long term capital appreciation? What will you do with investment returns? Withdraw? Reinvest it? What is your expected target return?
- Your risk profile: What’s your view on volatility? Can you ignore short term volatility to gain long term asset appreciation? If you lose 25% in investment value today, will you sell? Hold? Buy more?
- Investment horizon: How long is your plan? Do you want to stay invested for five years? Ten years? When will you need your principal sum back?
- Do you have any constraints? Are you an ethical or green investor?
- How often do you want to review your portfolio?
It’s important you discuss and agree on these with your financial adviser; the answers constitute your “constitution” of investing. The answer will also introduce discipline to your investment process. These help your adviser build a profile and then give you an investment plan that includes an asset allocation statement. Asset allocation is the key determinant to investment success. It matches your investment expectations to available asset classes.
Key deliverables from this stage will be an investment Plan with an asset allocation schedule. The schedule should list assumptions the plan is based on. This is important because you will amend the schedule based on changes to the assumptions underpinning the asset allocation schedule.
[READ ALSO: A case for investing in dividend stocks]
Next, even before investing a kobo in the Asset Allocation schedule, we have to ask three questions and make plans for them.
- How are we protecting Income?
- What’s our debt situation?
- Any plans for unforeseen expenses?
What happens to a debt or asset allocation plan if income is impaired? To be specific, if a parent dies, what happens? Death is a financial event; it has a serious effect on projected income, hence, that income must be protected. How is income protected? By buying life insurance. Thus, before proceeding with an Asset Allocation plan, the first thing to do is buy Life Insurance. Life Insurance protects income earned NOT life. I advise clients to purchase life insurance cover of minimum five times their annual income and consider life insurance that has an education element attached to it. Allianz has such a product. This is very important if the owners of the plan have dependents.
When I advise clients, I always focus on the Networth statements that score liquidity. Liquidity is how much the client has in net debt and expenses. If the client’s liquidity position is negative, then the plan is no longer an investment plan, but a debt reduction plan. The objective of debt plans is not to pay down 100% debt before investing but to create liquidity from available income and assets to make debt manageable. Debt can be managed and captured in the Asset Allocation schedule. Clients should not invest for returns until we address interest cost drag on liquidity. Simply put, why invest in bonds paying 12% when your credit card interest rate is 20%?
An Emergency Fund is simply three to six months non-discretionary expenses saved in cash or near-cash deposits. This is important because the asset allocation plan will require consistent financial commitment in investing, and the emergency fund acts as short-term protection to our plan. Take for instance a medical emergency; we will not want the investor to sell down his investment for this important cost, thus he taps from his emergency fund.
Implement your plan
Once you have satisfied the life insurance, emergency funds and debt, start to implement your plan to meet the asset allocation schedule. It is important to be religious in implementation. Pay yourself first with automatic deposits from your bank to investment plans. Be constant and seek managers who will charge lower fees. Fees and Inflation will remain the key dangers to your plan. You can’t control inflation but you can control fees.
A N100,000 portfolio that rises 20% means you earn N20,000 but if you pay 2.5% in fees, it means you pay 13.8% of your gains in fees. However, A N100,000 portfolio that rises 20% means you earn N20,000 but if you pay 0.5 % in fees, it means you pay 2.8% of your gains in fees.
Last point? Always watch your portfolio, review as appropriate.
5C’s of creditworthiness: What lenders, Investors look for in a business plan
Business owners need to be aware of the criteria lenders and investors use when evaluating the creditworthiness of entrepreneurs seeking financing.
Banks usually are not a new venture’s sole source of capital because a bank’s return is limited by the interest rate it negotiates, but its risk could be the entire amount of the loan if the new business fails. Once a business is operational and has an established financial track record, banks become a regular source of financing.
For this reason, the small business owner needs to be aware of the criteria lenders and investors use when evaluating the creditworthiness of entrepreneurs seeking financing.
Will the business that an entrepreneur actually creates look exactly like the company described in the business plan? Of course, not.
The real value in preparing a business plan is not so much in the finished document itself but in the process it goes through – a process in which the entrepreneur learns how to compete successfully in the marketplace. In addition, a solid plan is essential to raising the capital needed to start a business; lenders and investors demand it.
Lenders and investors refer to these criteria as the five C’s of credit.
1. Capital: A small business must have a stable income base before any lender is willing to grant a loan. Otherwise, the lender would not be making, in effect, a capital investment in the business. Most banks refuse to make loans that are capital investment because the potential for return on the investment is limited strictly on the interest on the loan, and the potential loss would probably exceed the reward. In addition, the most common reasons that banks give for rejecting small business loan applications are undercapitalization or too much debt. Banks expect a small company to have an equity base investment by the owner(s) that will help support the venture during times of financial strain, which are common during the start-up and growth phases of a business. Lenders and investors see capital as a risk-sharing strategy with entrepreneurs.
2. Capacity: A synonym for capital is cash flow. Lenders and investors must be convinced of the firm’s ability to meet its regular financial obligation and to repay loans, and that takes cash. More small businesses fail from lack of cash than from lack of profit. It is possible for a company to be showing a profit and still have no cash – that is, to be bankrupt. Lenders expect small businesses to pass the test of liquidity, especially for short term loans. Potential lenders and investors examine closely a small company’s cash flow position to decide whether it has the capacity necessary to survive until it can sustain itself.
3. Collateral: Collateral includes any asset an entrepreneur pledges to a lender as security for repayment of a loan. If the company defaults on a loan, the lender has the right to sell the collateral and use the proceeds to satisfy the loan. Typically, banks make much unsecured loans (those not backed up by collateral) to business start-ups. Bankers view the entrepreneurs’ willingness to pledge collateral (personal or business assets) as an indication of their dedication to making the venture a success. A sound business plan can improve a banker’s attitude towards venture.
4. Character: Before extending a loan or making an investment in a small business, lenders and investors must be satisfied with an entrepreneur’s character. The evaluation of character frequently is based on intangible factors such as honesty, integrity, competence, polish, determination, intelligence, and ability. Although the qualities judged are abstract, this evaluation plays a critical role in the decision to put money into a business or not.
5. Conditions: The conditions surrounding a funding request also affects an entrepreneur’s chances of receiving financing. Lenders and investors consider factors relating to a business’ operation such as potential growth in the market, competition, location, strength, weakness, opportunities and threats. Another important condition influencing the banks is the shape of the overall economy, including interest rate levels, inflation rate, and demand for money. Although these factors are beyond an entrepreneur’s control, they still are an important component in a banker’s decision.
The higher a smaller business scores on the five C’s, the greater its chances of receiving a loan.
Written by Chukwuma Aguwa
Don’t be fooled by COVID-related scams
Always consult the institution in charge of health-related matters to confirm any fishy information you come across.
The nature of and the manifestation of the Covid-19 disease is such that there’s only a little time available to remedy the situation before it gets chronic. Although the infection begins by exhibiting mild symptoms, if you do nothing in a short time, it could lead to death in a matter of days.
This whole picture has caused many to become desperate about Covid-related issues, launching into panic mode at the sight of any information. As a result, such people are not far away from falling for fraudsters.
With the different kinds of news flying around, you mustn’t be fooled by Covid-related scams.
The Coronavirus threatens the health of millions of people around the world daily, also killing thousands along the way. To curb the spread and remedy the situation, bodies like the CDC, WHO, and every country’s local health organisation like the NCDC, frequently circulate information around communities. However, it has also led to fraudsters taking advantage to provide fake news, and even asking for donations.
Each day, there seems to be a new account or NGO asking for donations into the health sector, and though some are legit, many are just fraudsters posing to take advantage of innocent citizens. So far, numerous complaints about scams have been recorded, especially with people who are looking to support the health cause in any way they can.
Channels used for COVID-related scams
There are three major ways scammers take advantage of the haziness of the situation to dupe people. To start with, they appeal to the emotions of humans, who see the high death toll and suffering. As a result of what is happening, people have been willing to donate funds for medical supplies, isolation centres, and financial compensation for medical workers.
Scammers take advantage of this by posing as charity organisations and solicit for funds. Most times, as soon as their target is met, they clear their footprint without leaving a trace behind.
Another way they scam people is by manufacturing and selling fake or low-quality health products. Everyone wants to get their hands on a cure, or something that can at least protect them from the virus, and scammers are meeting their needs by providing just that.
The World Health Organization currently approves only one vaccine, and any other thing outside it is outrightly fake or just a supplement that will help your body. Currently, only the Pfizer vaccine is clinically tested and approved to work. Be sure to not throw your money in the wind by purchasing some of these fake drugs around.
Lastly, scammers create systems to extract a patient’s personal information, thereby having access to the person’s true identity. It could be in the simple form of opening a registration portal where you supply all your details.
Therefore, only give information to approved bodies and not any random online site that appears legit. These fraudulent individuals can do a lot of damage to your identity. Stay vigilant, only communicate with approved bodies, and always ask questions if you are not sure or suspect foul play.
The place of electronics in COVID-related scams
These fraudsters usually reach out to you through the digital sphere. Hence, watch out for cold calls, text messages, or emails requesting donations to certain bodies. The best way to confirm the legitimacy of such a message is to visit the organisation’s official website in a different browser. Never follow the link in the mail or text directly, as it can be easily embedded with spyware. Therefore, a single click could see them extract all your personal information, including bank details.
Also, please stay away from those who claim to have a cure, and accompany it with testimonies of people who have used it. They are low graders desperate for your money. Vet them by searching online and see what people are saying. In all, always look out for suspicious messages, and opt out if you are sceptical.
In a nutshell, you should not believe any cure, vaccine or supplement that the World Health Organization does not approve of.
The government or legit health institutions do not cold call citizens to request donations or coerce them into making one. If you receive a call out of the blues, chances are it’s a scam, which is why they mostly try to hurry you to donate before you realise it. Always consult the institution in charge of health-related matters to confirm any fishy information you come across.
Nairametrics | Company Earnings
- 2020 FY Results: Cornerstone Insurance Plc reports a 61.1% decline in profit
Cornerstone Insurance Plc has released […]
- Ellah Lakes increases operating expenses by 33.36% in HY 2020
Ellah Lakes Plc released its half-year […]
- 2020 FY Results: Nigerian Breweries reports a 54.3% decline in profits in 2020
Nigerian Breweries Plc released its […]
- Abbey Mortgage Bank projects N51.08 million profit in Q2 2020.
Abbey Mortgage Bank has released its […]
- Dangote Sugar increases post tax profit by 33%, as earnings per share prints at N2.45
Dangote Sugar released its full-year […]