Personal Finance with Edirin - 5: 2021, where the money resides

Where the money resides

For the New Year, I am working towards a more automated approach to handling my money.

I am one of those people who ABSOLUTELY loves the smell of NEW things, and a new year is no exception.

I like how a new year offers a renewed sense of hope; a willingness to go after things we may not have attained, or, you know, just a new burst of energy to reach for things we previously believed to be out of reach. Either way, I LOVE new years.

Besides the new energy a new year brings with it, it allows me to look back on what I spent money on in the last year (QUACKTAILS); how much I spent on clothes in the whole year (N68,840, which I’m happy about because I had a 100k annual limit last year), how much I earned from my investments (redacted), and how much I re-invested from my passive earnings (80%). I’m not sure if you can tell but I am pretty pleased with my money performance. Last year saw me switch careers and I still somehow managed to keep both eyes on my personal financial journey.

For the New Year, I am working towards a more automated approach to handling my money. I am approaching a decade of work experience and almost 5 years straight of tracking my expenses, so I am making two major changes to in my personal finance journey for 2021:

1. Optimizing the process of tracking my expenses

2. Diversifying my investments at a more granular level

Previously I had a standing meeting with my trusty excel sheet and all my account statements weekly, but this year I am leveraging technology and making it a monthly appointment. I will be moving my expense account from GTbank to Kuda bank where their banking app allows you to categorize your spending and pre-groups it so when you download the bank statement, it is already pre categorized. Hence copy and paste into my excel sheet- I can’t wait to see how this is going to work out but I am confident that by the second month it will be smooth sailing.

The granular level focus for my investments will involve me looking into the US index funds, specifically the Vanguard VTI. For foreign investments, I had previously just used specific investment vehicles via trusted parties, but this year I want to get into the US stock market. Never Nigeria because inflation erodes all the possible gains. I am looking to leverage the magic of compound interest and constant dividends from the index funds that have historically returned an average of 13% per annum in the last ten years.  Nothing too crazy but since the rule of 72 shows that it will take approximately 6 years to double whatever I invest; I’m hoping for a nice dollar nest once I turn 40.

The one thing I love more than the energy of the new year is a year that you have created with good financial decisions in prior years. This article https://www.economist.com/finance-and-economics/2020/10/20/wall-street-will-soon-have-to-take-millennial-investors-seriously quotes BOA research that says that Millennials are about to enter the peak earning years of their careers, and their earning power will jump by almost 75% in this decade (AMEN?!). Millennials are born between 1981 and 1996, so if you are reading this, E FIT BE YOU. A new year allows you to plan a life and future that you want, and the best way to predict this future is to create it with a financial road map that you will follow, tweak and trust that it will get you there in one piece.

Look, if 2020 was bad for you money-wise, that’s fine- let it go because it’s gone. You are here at the precipice of a new year and endless possibilities lay before you to create your new future. If you think this is going to take time, I want to encourage you to do it anyway because the time will pass. The year will come to an end and 2022 will come. Let this year be the year that you sit with your money and figure it out, I am rooting for you to be victorious. Do not be afraid to have BOLD money plans but remember to break them down into bite-sized steps that will not overwhelm you. Remember, the confidence from small wins compounds and snowballs into concrete trust in ourselves, assuring us that we are making the right decisions for our money, for ourselves, and our future(s).

In the words of my favorite December 2020 meme,

In 2021, I’m going to be where the money resides!

Happy new year my darlings!

Ps: If you are overwhelmed with planning your financial 2021, send me an email at contact@peermentorcircles.com and I will send you a copy of a money workbook I think will be a decent guide to create an annual plan.

Personal Finance with Edirin - 4: Emergency Funds

Emergency Funds

An emergency fund is at its core, a stash of cash for the rainy day.

I feel like before I get into what an emergency fund is and what constitutes Financial emergencies, I need to applaud you guys for doing the thankless but oh so rewarding work of getting a grip on your personal finances.

So well done and congratulations on doing getting your house in order and getting really cozy with your numbers.

Initially, I was going to speak on Debt which is the final component of the expense portion on the wealth formula we discussed in week one. The one about increasing the gap between what you earn and spend, and investing that gap. And wash rinse repeat. I even had the perfect song layout and everything, BUT THEN, something fantastic happened and I was like okay, this topic is important and for some reason feels urgent.

An emergency fund is at its core, a stash of cash for the rainy day. Keeping in theme with the sailing examples, it’s basically a lifeboat that you have available in the middle of a really bad storm when your ship hits the rocks, that takes you safely to shore. Where hopefully you find another ship that gets you back in the water.

When building emergency funds, everyone has their preferences surrounding certain aspects, such as how long it should take you to build it, in what currency you should store it, where you should store it etc, but today I’m going to suggest very adamantly the preferences that you should use when you get around to building your emergency fund ( hopefully ASAP).

Building an emergency fund is parallel to the already perfect budgetary system you have running, meaning it’s separate from it. It not going into your monthly expenses, It’s a target outside of the realistic money goals you have been setting and refining. And it certainly isn’t a loan pot for things that come up surprisingly.

In Personal Finance, emergency funds are for ONLY, ONLY, as in ONLY emergencies. And in this case, your ONLY emergency is the loss of your income source. i.e. loss of Job, shutting down a business, death of sugar daddy. You get the drift. The really really serious stuff. Your co-workers asoebi is not an emergency. Look corona is outside and who knows when the wedding will be?

Now, if you are wondering how to ascertain how much should be in your emergency fund, a good rule of thumb is three to six months of your monthly expenses stashed away in a very easy access account (by access I don’t mean ATM, I mean that it’s being kept in an account where withdrawing the funds in case of an emergency, doesn’t become a long thing) in the currency with which you settle your daily obligations.

I strongly suggest that you have a minimum of 6 months. Only you know what the amount is for you because (hopefully) you have been tracking and fine-tuning your monthly expenses, so you can comfortably multiple that number by 6. Whatever answer you get is how much you should be targeting to have in the Emergency Fund. So, for example, if all your actual monthly expenses and provisions come to N350,000, then your emergency fund should be N2,100,000. That’s it. (350,000 multiplied by 6).

I also very adamantly suggest, that you keep this money in a money market fund account, it is easily accessible, re the criteria two paragraphs above, and not in a savings account. For a myriad of reasons, but the most important is that the interest rates in Nigerian Savings accounts are abysmal. The likelihood that the cost of the text message the bank uses to notify you of the interest is greater than the value of the interest you’d have earned, tells you all you need to know about how I feel about putting your emergency fund in a local savings account.

If you do not want to use Mutual funds, please look intoPiggyVest or CowryWise - they seem to have various saving plans that have easy withdrawals.

Whatever you do, please do not put it in the bank.

Do not put it in an account that can go down in value, because you want the principal as secure as possible.

Do not put it in somewhere that you’ll be charged for taking it out.

Additionally, I know we are trying to buy and hold United States Dollars right now ( which is a great idea by the way with the wildly upwardly fluctuating exchange rate); however for your emergency fund, you need to consider how easily you’d be able to convert your dollars to Naira to access it when the need arises.

As much as we want to grow this money and be tempted to invest it, please don’t. This money is basically insurance to ensure your life can run as smoothly as possible for the next six months in the event that your major income source goes bust. This Emergency fund provides you with a breather so you can plan your next steps in getting back on track to earning income. This buffer will make the recalibration process soooo much easier knowing that you have a cushion and that you can afford to actually take your time in making the right next step.

Until next week, I leave you with the immortal words of P-Square

If I no get money, I get place to borrow.

*If you want a copy of my customised excel expense tracker please send an email to peers@peermentorcircles.comand you’ll be sent a copy along with instructions on how to use it.

Personal Finance with Edirin - 3: Budgeting

Budgeting 101

You should have a good idea of what your money is being spent on.

I’m using ‘budgeting’ here very loosely to show you how to create a blueprint of what you want your money lifestyle to look like and eventually become if you follow my advice diligently.

So, you have defined your money goals, and for the month of July you (should) have tracked your expenses. You (should) now have a good idea of what your money is being spent on. Now we are going to take the information from there and build this into a new money lifestyle.

Before we begin, I need to do some positive PR for the word ‘budget’. Some people hear the word budget, as a noun and recoil in disgust (most likely because they have associated it with limited resources - instead of the ALLOCATION of resources). Some hear it as a verb and suddenly, a series of instant gratification spending sprees ensue. I am here today to start the image laundering for Budgets both as a noun and a verb. 

The first thing you need to know about a budget as a noun – is that it is sort of like a map or a globe, and tracking your expenses is like a compass to see how far you are veering off on your financial freedom journey. ‘Budgeting’ as a verb is simply you adjusting your sails when the winds are favorable or unfavorable; making sure your life vests are in order, checking for leaks on your boat. You are basically doing what you can to ensure there are no avoidable mishaps. That’s what ‘budgeting’ as a verb really involves. Although the process of budgeting is personal, I’m going to lay out a framework with examples of how to do it, so that eventually you may even start to enjoy budgeting, both as a noun and verb.

Set long term and short term money goals

First, we set our REALISTIC** money goals, which I hope we have all done. 

Now, go a step further and split these goals into long term and short term goals. While these are different, they are both equally important and they complement each other - your short term spending impacts how much you have to put away, and therefore influences how much you’d have later in life. Short term goals should really be interlaced with targets that involve working towards fulfilling your long term goals. 

A very simple example to illustrate this: 

Your long term goal is to own a house that costs N50 million and you want to close this out in 5 years, and lets say, your short term goal is to settle all your monthly obligations as at when due i.e your service charge, monthly toll gate, personal shopper subscription, etc. 

In the absence of an additional stream of income, incorporating your long term goal of paying for your house in five years will mean that you’d substitute your personal shopping service subscription, and use those funds towards your N50 million payment. 

If you previously every month spent 500k a month on your personal shopper, you’d re-route those funds towards either making monthly payments to the developer of the 50m house or invest it in a fund that’ll yield interest and then at the end of the year, close out the fund and transfer the money to the developer.

Now it’s really important that when we set our long term goals, we set goals that are personal to us as individuals. Doing this gives us the emotional buy-in to let us follow through with our short term goals that support the long term goals. 

Building on the house example above, if you want to buy a house because Mrs Jones, just bought a house, even though you have never wanted to be a homeowner, then making and following through with your newly defined short term goals, would be akin to entering the express without being careful. 

Word to Egungun. 

What I mean to say is, I have found and I continue to find that it just won’t work. Following through will be painful, you’ll be irritated and honestly, you’ll start having beef with ‘Budgeting’ as a noun and verb. 

Work towards creating provisions in your budget. 

Note: I do not mean provisions as per foodstuff a la boarding house (to all of you tempted to misbehave). I am talking Provisions like making allowances in your budget for predictable expenses that are yet to crystalize, but you know will come as surely as day follows the night. For instance, if you have a car, you know you have to service it. Maybe not monthly but definitely at least once a quarter. What provisioning does, is that feeding in from your tracked expenses, so that you can anticipate and then provide for these costs monthly, and when they crystalize, you just make the payment without losing sleep over what to substitute. 

Now you might say, “ah, but I didn’t anticipate this expense”, to you I say, I promise you if you have tracked your expenses long enough, at the end of this year 2020 you won’t have any more unanticipated surprises. 

Remember that budget isn’t set in stone, it’s flexible and thankfully excel is easily customizable so you can add or delete new line items for provisions as necessary. 

Another Illustration: 

Let’s assume you service your car once in 3 months or every 5000 kms and it costs you 15k. But the last five times your mechanic has come to service your car he has needed to change one thing or another and you end up spending 20k. When creating your budget, for your monthly expenditure, you include 6,700 in a budget line item that says car servicing, and at month end you move this amount to another one of your many bank accounts that isn’t your major spending account.  When your car starts making a strange sound and it’s time to service it, there is minimal panic in your mind because the money for the mechanic has been set aside and is waiting for him to come and fix your car. 

Your expenses become like water off a duck's back. Easy and borderline enjoyable.

Now that you have an idea of what your monthly expenses are, because you are diligent tracking your expenses, you also have a clear idea of what you want to do in the long-term. Mine includes seeing all  the seven new wonders of the world and I have a travel fund that I fund frequently enough that I’ve seen two of the seven already. You know what your personal non-monthly expenses are and you have created provision line items for them in your budget (these can range from Annual rent; to quarterly car servicing cost, or can even be a beauty treatment you want to treat yourself to at Christmas). 

When you put all of these together in your excel sheet***I present to you, your budget. 

The best part of creating a budget this way is that you can compare your tracked expenses to the budgeted amounts AND can adjust variations such that you are two steps ahead of financial surprises. This works both ways as well, when you begin to track and compare your actual with your budgeted, you begin to see the pattern in your spending and understand the why behind why you act a certain way surrounding your money spending.

After tracking my expenses and comparing to my budget, in the 3rd month I figured out that when I got my period, I had the tendency to morph into a debit card ninja, swiping through all the Instagram retailers and buying things I had no interest in. Once I discovered this, I decided to pick one item and I now subscribe to a beauty box service. What this does for me is that it further strengthens my delayed gratification muscle and I receive a range of beauty items at the peak of my cycle when my PMS is driving me crazy. Prior to this I had spent a huge amount of money on things I honestly had no need for and I struggled to understand why I kept splurging.

Honestly, a well created budget is your best friend. 

There isn’t a better map to financial freedom. When wielded properly, it helps you create a richer and less stressful future for yourself.  I implore you at your money confidential meeting this week to really sit with the numbers and create a budget that gives you the freedom to give yourself the financial life you deserve.

Till next week, I leave you with the immortal words of ABBA,

All the things I could do, if I had a little money, it's a rich man's world.

ABBA

**Realistic caps lock to really emphasize that while you can afford anything, you can’t afford EVERYTHING, and your budget should really only reflect the things you want that are important TO YOU, as an individual.

*** Please send an email to contact@peermentorcircles.com for a copy of the excel sheet I use to set my monthly budget that feeds into my annual budget and allows me to track my expenses so that I can make real time comparisons. Also if you reached out last week, you should have more clarity on the extra sheets and how they work after this post.

Personal Finance with Edirin - 2: Tracking Your Expenses

Hello!

So, if you followed the steps, I outlined last week, you have:

• Set the time aside for your money confidential meeting

• Spent all your money from one account

• A general idea of why you want to get a hang of your personal finances

Track your expenses

The next step is to track your expenses. If this sounds daunting, please don’t be alarmed. It’s probably one of the easiest bits of personal finance, and it creates the largest framework for you to build on.

Let me tell you why…

Well for one, what you do not measure you cannot grow. When you do not track your expenses, you give assumptions liberty to enter the group chat and if there is anyone you do not want in the group chat when dealing with your money, it’s assumptions.

When you track your money, you can see CLEARLY what you use your money to do. It’s fascinating because you might be thinking, “I do not eat out that much'“, but when you track your expenses, you can put a number to “that much” and usually that number is outside of the ballpark of whatever number you had previously assumed to be “that much”. See why we have to remove assumptions from the money confidential group chat?

What does tracking do for you?

Tracking your money provides also clarity on your likes and dislikes. It lets you know what you like, love, hate and couldn’t care less for. Honestly, you track your expenses and realise that as much as you enjoy getting your nails done, you aren’t doing it that often, meaning you may not like it as much as you tell yourself. Or, on the other hand, you may be telling yourself how much you absolutely hate movies and you never watch TV, but your expenses show you paying for monthly DSTV, Netflix and weekly visits to the cinema.

Beloved, the numbers do not ever lie.

In addition to the above, tracking your expenses gives you the ability to have a bird’s eye view of your lifestyle and allows you to build a personal budget that you’ll be more likely to follow since all the data you will be using comes from your actual real-life current expenses. Instead of a budget based on some arbitrary ratio that doesn’t take into account the realities of your actual lifestyle.

An added advantage of tracking expenditure is that it cures the delusions surrounding the idea of how much we can cut out of our expenses when we start getting serious with our savings. It gives the most realistic snapshot of what your spending is like, and then you can personally identify what you can do without because you know what you are spending your money on and the why behind that certain expenditure. Think of it like this: what is the point of saying you are going to put aside X amount into a savings pot, and by the 10th of the month you dip into your X pot because Y came up reducing it to Z? Now you are upset with yourself because you did not stick to your plans.

Tracking your expenses saves you from making unrealistic money plans and helps you follow through with the real ones.

How do you track your expenses?

So, how do we track our expenses? By simply writing out all the money we have spent and what we spent it on. Some people use good ol’ paper and biro in a little notepad they carry everywhere with them, so they don’t miss any bit. Some use digital banks and personal finance apps such as “Monzo” (in the UK), and “Mint” (if you’re US-based). The Kuda bank app (for those of us in Nigeria) apparently helps you group and by default track your expenses too.

Since all your spending has come from one account in the last week, the probability of missing out on any expenses has been reduced to ZERO. This means you have the most complete picture of all the money you have spent since July 1. This means that you have removed an extra barrier to tracking your expenses. At your money confidential meeting this week, I implore you to open that banking app, download your bank statement for the last two weeks. Then launch preferred means of tracking your expenses and begin to transfer and populate.

Where can you find expense-tracking tools? 

Personally, I use spreadsheets (Microsoft Excel/Google Sheets are both fine), for a number of reasons, top of which is, it requires little to no effort to utilise on my part, it’s very easy to manipulate and I can customise my tracked data. I mean, I can literally tell you how much I spent on Tollgate fees for the whole of 2018**. It is also super easy to replicate for other people. If you want a copy of my customised excel expense tracker please send an email to peers@peermentorcircles.comand you’ll be sent a copy along with instructions on how to use it. If you’d rather not, a cursory google search should present tons of excel expense tracking templates.

How do you get past your spending tracking hang-ups?

While the concept of tracking expenses may excite some people, others might be apprehensive when they have to look at the numbers or view the results. All I’ll say is while money innately has value, it is by nature, amoral, i.e. it’s neither good nor bad - it’s simply money. All it does is serve the purpose you have given to it. Tracking your expenses lets you see what purpose your money is serving; it lets you course correct as realistically as possible while giving you an aerial view of the journey your money is on. So, think of tracking your expenses as using a compass on your journey to financial freedom.

Till next time, I leave you with the immortal words of Jermaine Dupri

“Money ain’t a thang”

Jermaine Dupri

Edirin

** NGN 60,800- if anyone is interested.  Also good ol' days of N120 toll gate or what? The 2019 number is making dizzy.