The road to financial freedom is not for the faint of heart. You need to make smart decisions if you want to achieve your goals in the long run.
Today, we’ll be looking at some money mistakes people (especially those who have just left school and started out in their careers) make. These constitute a major barrier in becoming financially successful before retirement comes knocking.
Let’s get started, shan’t we?
Failure to start saving for your retirement on time
Most young people wait too long to start saving for their retirement. They keep waiting for the right time. But the right time should be now. If you find that you are unable to set apart a portion of your income without going right back to dip into it, don’t waste a minute to start identifying your bad spending habits and eliminating them.
Planning for retirement is a life-long endeavour. Think of it as a marathon. To arrive at your destination faster, you have to start on time and maintain a steady pace.
Try putting at least 15% of your total income each year into a savings account. So if you earn N100,000 a month, you should have at least N180,000 saved up each year for your retirement.
Note that your retirement savings should be separate from your investment and emergency savings.
Here’s what you need to know:
- In your 20s, you should have 1x your annual earnings saved up for retirement.
- In your 30s, 3x your annual earnings
- In your 40s, 6x your annual earnings
- In your 50s, 8x your annual earnings
- At 60, you should have 10x your annual earnings as your retirement savings.
If you feel you don’t make enough money to be able to save successfully, know that it’s a myth. There’s no such thing. If you are finding it difficult, all you have to do is adjust your habits so you can spend less than you make. There is always a way to cut back on your spending. But if you’ve tried it all without much improvement, setting aside as little as N4,000 a month is still progress.
Spending at the same rate you earn
Most people make the mistake of increasing their spending as their earnings increase, without saving and investing proportionately as well. They, therefore, end up being money conduits, and no matter how much they earn, nothing is left by the time the month/year runs out. No investments, no savings, and very negligible net worth.
Lifestyle inflation (increasing your spending as your earnings increase) is a trap you should avoid by all means. When you are young, it’s fun to live in the moment and enjoy life. But don’t forget to plan for your future or you’ll never attain financial freedom.
If you get a raise, rather than go on an expensive trip or buy a new flashy car that obviously won’t yield income, and might even get you in debt, consider increasing your savings instead and make an investment.
Focus on the bigger picture. With the right savings and investment habit, you can grow your money and spend on more important things like taking care of your family, building a house, starting a business, and planning for early retirement.
Not being mindful of your health
In the HBO feature, ‘Becoming Warren Buffet’, while talking to a class, the Nebraska-based billionaire advised that you have only one mind and one body that should last you for the rest of your life. If you neglect to take care of it, you won’t be able to achieve your dreams in life.
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To live long and avoid paying huge bills on medical treatment in the future, you need to start being proactive about your health. Maintain a healthy eating habit and have an exercise routine. Don’t fail to go for regular medical checkups. This will ensure that any health issue you might have can be identified early before it becomes serious.
Not having an emergency budget
Don’t make the mistake of having just one savings fund. Doing so would mean that you’ll have to dip into it when an emergency arises, in which case you have not saved successfully.
Have separate savings for your retirement, emergency, investment, and so on. Your emergency fund will come in handy if you happen to lose your job, get in an accident, fall ill, or have several other unforeseen situations. It is your safety net to keep you from falling into debt.
Typically, it should provide you with three to six months of living expenses that you can fall back on when you have no income stream.
There’s also something known as a rainy day fund. This should be separate from your emergency fund. It is meant for smaller, more predictable events, such as fixing your car at the mechanic or taking your child to the hospital.
Not making any investment
Investment is something you must not neglect if you wish to become financially free. Many people live out their lives earning a salary and paying bills, and failing to establish a source of passive income.
Granted, making an investment comes with its risks, stock market investments most of all. You won’t be able to control how the market behaves or your rate of returns. But you can control how much you want to set aside for the long-term and what you want to invest in. Try and diversify your portfolio. If you are unsure what to invest in, consider consulting a financial advisor.
There you have it.
If you are making any of these financial mistakes, try and retrace your steps – better late than never.
[READ FURTHER: Love, Dating, and Marriage are financial events too…]
Is investing dead?
It appears the rules of investing have evolved from buy low to sell high, to buy high to sell higher.
Warren Buffett spent $7 billion to $8 billion on positions in Delta Air Lines, United Airlines, American Airlines, and Southwest Airlines. In 2021, as the scale of the Coronavirus-induced lockdown became apparent, the Oracle of Omaha, Warren Buffet sold all his airline stocks. This was no casual decision, Buffet has said that his favorite holding period is “forever” and his strategy is to buy companies, milk them of cash, pay no dividends, and compounds his returns by holding.
Why did Warren sell? Well, you don’t have to be an investing genius to see any virus that stops global commerce will affect business travel and thus reduce revenues flowing to airlines, thus airlines stock prices were going to fall. Buffet got out to avoid a diminution in the value of his position.
At the 2021 Berkshire Hathaway Annual Shareholders meeting Buffet said he diverted so the airlines would find it easier to get the CARES Act government funding, ok but the story is not about Buffet but about what happened when he sold.
Usually, Buffet buying a stock is a stamp of approval on that stock, ditto when he sells. When Buffet sold in May 2020, the shares of the US-based airlines tumbled with American Airlines falling 7.7%. After Buffet sold, stock of the airlines rose in April as retail investors bet against the judgment of Buffet.
Was Warren Buffet wrong?
Let us take a look at another example. Hertz filed for bankruptcy in May 2020, meaning that its stocks became worthless, its shares kept falling to as low of $0.40, yet its stock appreciated in price to a high of $6.00 as retail investors (again), many of them on Robinhood, pumped up purchases on this stock because it was rising in price, in essence creating a self-fulfilling buying hurricane and pumping up a stock worth zero. The higher prices were trailed by even higher demand.
Were the retail investors naïve? No, they understood the risk when Hertz tried to take advantage of the demand by selling new shares with this clear warning: “we expect that common stockholders would not receive a recovery through any plan unless the holders of more senior claims and interests, such as secured and unsecured indebtedness are paid in full.”
So what’s going on? Is investing dead? We can argue that retail investors bought into Airlines because they were aware the US government would rescue the airlines with a package worth billions. They also anticipated that the stock price having fallen so low represents a discount to the existing price. They were buying low to eventually sell higher.
Why would retail investors buy a bankrupt company? It appears the rules of investing have evolved from buy low to sell high, to buy high to sell higher.
The price of any stock used to be the discounted present value of all future earnings, thus if I say the price of Zenith Bank today is N20, I am stating that if I take all earning of Zenith Bank from the future and discount them back to today using an agreed discount rate, I will arrive at N20. The P.E. relates the price of the stock to the earning and is often looked at as a measure of how expensive the stock or market is when compared to earnings. The PE of the US markets as measured by the Schillers CAPE valuation is at 36.6. this represents the second-highest level, since 1890. CAPE looks at the last 10 years of earnings adjusted for inflation.
Investing was a “simple” exercise in seeking to determine the intrinsic value of a stock, using fundaments such as market share and earning and then buying if intrinsic value is less than the market price and vice versa. Not anymore!
This goes far beyond traditional assets, there is an uptick in selling prices of alternative assets such as NFT and cryptocurrencies, with cryptocurrencies like Dogecoin up 675% in 3months.
So is investing dead? Not yet. The issue is liquidity, excess liquidity in the US. The average retail investor has seen two stimulus cheques from the US governments and interest rates at record lows. This means the average US investor has an incentive to take on more risk to earn above safe fixed income yield. Another driver is the record appreciation in home prices, especially in the suburbs. Many American homeowners can take “equity” (difference between home value and mortgage, if any) from their homes at record low rates and invest. This excessive liquidity is looking for where to “park” and is showing up on heightened valuations aka “bubbles.”
In Finance, there is a theory called the Greater Fool theory, where prices can keep rising as long as the current holder of any asset can sell that position to another investor at higher prices. The new holder then sells to a new investor at a higher price and so on. We are watching that right now.
In the long run, the market will correct, and valuations will again reflect earnings, the trigger will be the decoupling of the US Federal Reserve from bond-buying and the rise in yield which signals inflation. My advice to any investor is to ensure that when the market corrects, you are vested in quality assets.
How to invest in Nigerian Eurobonds
Before investing in Eurobonds, weigh the bond’s risk characteristics and set them against the interest rate to know if it is worth it.
As of 2019, Nigeria’s Eurobonds were regarded as one of the top 5 best-performing Eurobonds in the world.
Although Nigeria’s Eurobonds remain one of the most profitable in the investment world, not many individuals know how to invest in them. The Federal Government and a number of corporate organisations in the country subscribe to Eurobonds and issue them quite often, lending credence to their attractiveness as an investment tool.
What is Eurobond?
Basically, Eurobonds are financial instruments issued by a country or corporate organisation in a currency different from the currency of the issuer.
Nigeria typically issues Eurobond instruments denominated in US dollars. For example, the 6.75% $500 million January 2021 Eurobond was denominated in US dollars.
There is the sovereign, which is referred to as a government bond, and the corporate bond. Eurobonds operate like fixed income securities in terms of bond instruments. It has a coupon, an interest rate paid on bonds (which is paid bi-annually), a price at which the bond will be purchased, and also a yield.
The price and yield have an inverse relationship meaning that when the price goes up, the yield comes down. When the yield is coming down, the instrument is trading at a premium compared to when it was issued.
An investor can buy Eurobonds while the primary auction is ongoing or later, at the secondary market, for those who were unable to participate in the primary auction.
How to invest in Nigerian Eurobonds
The process of investing in Eurobonds in Nigeria is not any different from that of investing in local bonds. Both bonds can be bought from either the primary market at the initial offer level or at the secondary market for existing bonds.
All that is required is for the investor to complete the tender for the Federal Government of Nigeria or corporate bonds form, submit the tender through any of the authorized dealers and make the required payment when the bid is successful.
Basically, for banks, your account has to be funded with the desired currency. For instance, to buy a dollar-denominated Eurobond which is the conventional one issued in Nigeria, you have to fund your account with dollars, then send an instruction for the bond purchase.
Be mindful of the bond’s risk profile before investing
Eurobonds can either be corporate or government bonds. Corporate bonds may offer higher interest rates than government-issued Eurobonds but they also come with higher risk.
If you want to invest in Eurobonds, ensure that you weigh the risk characteristics of the bonds and set them against the interest rate to know if it is worth it. Most Eurobonds come with credit ratings, which serve as a measure of their quality and risk profile.
Usually, bonds with the highest quality credit ratings come with the lowest yields while bonds with lower credit ratings offer higher yields. The yield, in this sense, is a measure of the bond issuer’s creditworthiness meaning that the greater the credit risk on an investment, the higher the yield investors would demand to compensate for it.
How to obtain an FG Eurobond
When bonds are issued at the primary market, the issuance document contains a list of the banks or brokers that have been authorized to sell the bonds. The FGN issued bonds are purchased through the Primary Dealer Market Makers (PDMMs). These are banks appointed by the Debt Management Office (DMO), to act as authorized dealers of FGN bonds.
Can you fund a Eurobond with a naira account?
Not at the moment! You need a dollar account (domiciliary account) that is funded but your bank can easily guide you on how to obtain one.
Next is to fill out instruction documents after which the bank will send you a market price and the expected yield. The bank then debits your account for the purchase. Every six months or on the specified coupon dates, you will receive your coupon and at maturity, you will get your principal back if the issuer does not default. A coupon or coupon payment is the annual interest rate paid on a bond, expressed as a percentage of the face value and paid from the issue date until maturity.
Here is a simplified example of the process:
You walk into a branch of your bank and ask to purchase $100,000 worth of Eurobonds. Note that your domiciliary account should already be funded with the amount. You would be required to fill out and sign the letter of instruction which would then be sent to the bank’s treasury unit for processing. The treasury unit responds with the available Eurobond prices and requests you to confirm the purchase. When that is done, the treasury unit executes the deal and holds it in their custody.
You can also sell the bonds at the secondary market.
Minimum investment as an individual
The minimum conventional investment tranche is $200,000, but a $100,000 worth of investment is also permissible. Amounts lower than this are however problematic because the secondary market trades in tranches of $200,000.
Can people invest through mutual funds?
Basically, what mutual funds do is amass investors’ funds and buy Eurobonds in the secondary market. A mutual fund is just like a vehicle that helps you to buy bonds so that you are not faced with the issuer’s risk directly. Therefore, individuals or institutions can also buy Eurobonds through mutual funds.
Mutual funds make it possible for you to participate in bond-buying with less than the statutory amount since they operate by pooling resources together from a large number of investors.
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