Budget for Love

It is Valentine’s Day on Sunday! ‘Tis the season of love 🙂 . In 2015, US$18.9 billion (yes, with a “B”) was spent on Valentine’s Day related gifts and activities in the United States of America. I do not have the stats for Nigeria or the rest of the world, but I can imagine the numbers are just as mind-boggling. So, we can safely conclude that love can get very expensive!

I will not go into the technicalities of what makes an appropriate Valentine’s Day gesture and what is not, how much should be spent, or whether to celebrate at all. What I WILL state is that: “Don’t let love break the bank!” Wondering what I mean? Let’s take a walk with Gbenga.

Gbenga is a 25-year-old man who is a junior analyst at a bank. He has finally gotten Yemisi, a 23-year-old intern, to agree to be his girlfriend. It is 5 days to Valentine’s Day, and he is thinking of what to do to wow her on that day. He has come up with the following plan to impress his girl:

Buy her a really nice piece of jewellery (cost: N25,000)
Take her out to dinner at a fancy restaurant (cost: N20,000)
Take her to see a movie she’s been wanting to see and grab a snack while at it (N5,000)

Total bill: N50,000

N50,000 may be a drop in the ocean for some, but not so for Gbenga. His monthly take-home salary is N100,000 per month and his regular monthly expenses are as follows:

Description Amount (N)

Rent (he shares an apartment with friends) 35,000
Feeding & Transportation 25,000
Tithe 10,000
School Loan Repayment 20,000
Contribution to Mama* 5,000

Total 95,000

As we can see, Gbenga has only N5,000 of “free” money left after he takes care of his needs and obligations – and he has not yet put anything aside for savings 😐 . His Valentine’s Day plan would surely break the bank!

We would not want Gbenga to get into financial trouble over love now would we? So let us give him some precious advice. Gbenga has two options:

Cut his coat according to his cloth: Gbenga’s true discretionary income this month is N5,000, so he can stick to the item on the plan that fits within his budget, i.e. take Yemisi to see a movie she’s been wanting to see and grab a snack while at it. This way, he is spending within his means, having fun while at it, and not taking on useless debt.
Save his money: This is even better; who says one has to spend money to have fun? Gbenga has a television in his room with a basic cable subscription. He can invite Yemisi and another of their couple friends over to a potluck dinner and in-house movie viewing :-). The benefits of this option are: (1) Gbenga and Yemisi get some quality get-to-know-each-other-better time between themselves, as well as with the other couple; (2) Gbenga gets to add to his savings; and (3) Gbenga has enough food (food never finishes at a potluck, he he) for the next few days, meaning he can save some of the amount he has budgeted for food.

If you were Gbenga, or Gbenga’s big sister, which option would you pick?

Happy Valentine’s Day in advance dear readers! And remember that true love has no price.

* featured image courtesy valentinedate2016.com

[Guest Post] The Importance of Financial Knowledge and Financial Planning – An Economic Migrant’s Perspective

Money Basics: “Better Late Than Never”

Risk Management 101 (Part II of II)

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Happy mid-week all 😀

Last week, we introduced Jummai and her self-assessed risk profile. We shall now go through each of the risks she identified, and the ways she can go about managing them. For each risk, we shall look at the following risk management strategies:
* preventive – to reduce the probability of the risk occurring, and
* curative – to reduce Jummai’s negative financial impact should the risk occur; these have to be implemented before the risk occurs though, otherwise it would be synonymous with campaigning after an election 😮

Health

image courtesy clker.com

This is the risk that Jummai will fall ill and (i) have to spend a lot of her salary on medical expenses; and (ii) not be able to earn her income as the illness may affect her ability to get her job done.

Preventive
- adopt healthy lifestyle habits
- maintain good hygiene
- go for regular health checks
Curative: purchase health insurance^ (also called medical insurance). Many employers already provide this as part of the employee benefits package. This is the case for Jummai. She, however, needs to obtain from her employer the details of what the insurance policy covers, and all relevant limits so that she understands the extent of her cover. If she thinks the cover provided by the company health insurance policy is inadequate, she should consider:
- obtaining additional health insurance coverage, either through her employer’s policy or by buying a separate policy on her own. Jummai should note that this will require her to be responsible for any additional payments to the insurance company.
- establishing and maintaining a special savings account for the purpose of funding health-related expenses not covered by the insurance policy(ies).

Auto

This is the risk that Jummai’s tear-rubber car may be involved in an accident that may, at best, result in damage to her car, another person’s car, or property. It could also result in bodily injury to herself or other people.

Preventive
- go for defensive driving classes (if you have ever driven in Lagos, Nigeria or New York City, USA, you will understand 😀 )
- ensure the car goes for regular maintenance checks and procedures
- proactively check her tyres and various car fluid levels before setting out every day
Curative
- use her seat belt every time, and encourage all occupants of her car to do the same
- purchase comprehensive car insurance^ (also called auto insurance)

Fire

This is the risk that Jummai’s car or residence may catch fire, destroying assets, some of which may be difficult to replace, and some which may be outright irreplaceable.

Preventive
- turn off the cooking gas supply whenever she is not cooking
- take other necessary precautionary measures while cooking
- be very cautious whenever there is a naked flame in or around the house
- take necessary precautions when handling fuels, gases, and any petroleum products, e.g. do not have a naked flame nearby or use an electronic communication equipment such as a cellular phone while filling a car/generator tank with petrol/gasoline
Curative
- install smoke alarms and water sprinklers in the house
- always have functioning fire extinguishers in strategic locations
- have a fire blanket, escape stairs, and other fire protection devices handy
- purchase home insurance^ (also called home property insurance) and auto insurance^

Theft

image courtesy fotosearch.com

This is the risk that burglars may break into Jummai’s home or car and dispossess her of her belongings.

Preventive
- choice of neighbourhood: we all know some neighbourhoods are more crime-prone than others
- install security deterrents: e.g. security doors, burglary proof bars, electric fences, burglary alarms, car alarms.
- be security conscious
Curative: purchase home insurance^ and auto insurance^

Education of dependent

image courtesy frescodata.com

This is the risk that Jummai may lose her ability to earn an income to continue funding Halima’s education, either due to a long-term illness, disability, or death.

Preventive: the preventive measures under “Health” above would apply
Curative
- purchase disability insurance ^
- purchase life insurance^
- establish an education trust^

Job loss

This is the risk that Jummai may have her employment unexpectedly terminated by her employer and not be able to immediately secure another source of income.

Preventive: Jummai needs to be an asset to her employer by being an exceptional problem-solver that they cannot do without :).
Curative: setup a 6- to 12-month emergency fund

Investment loss

This is the risk that Jummai may lose some or all the money she has invested due to a general economic downturn, or a reversal in the fortunes of the entity(ies) she invests in.

Preventive: Even though it is impossible for anyone to prevent a general economic downturn (economic cycles are a fact of life), Jummai could optimise her investments by engaging the services of a financial planner (like yours truly 😀 ), who would advise her on the best strategies to diversify her investment risk.
Curative: Making a financial investment is making a conscious decision to take on risk. Consequently, it is impossible for Jummai to insure herself against losing her investment should that risk materialise. However, by implementing the prevention strategy above, Jummai can reduce the loss(es) she does incur.

^ Always consult with a financial adviser so as to properly understand the terms and conditions of any insurance or financial product.

Do you have any additional preventive and / or curative risk management strategies to recommend for Jummai? Any risk exposures that she missed during her assessment? Or do you need assistance including risk management strategies in your financial plan? You could send an email to comments@finomics101.com, or leave a message in the comments box below.

Risk Management (Part I of II): “I should get insurance? Why?”

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… because it is a really smart thing to do :).

It is the first week of the year, and a lot of us have new year resolutions and “never again” predictions. Happy new year by the way :D. The new year usually brings along with it a heightened sense of hope and “can-doism.” But how many of us think about how to protect ourselves from the things that can go wrong? Have we included insurance in our financial plan?

This week we start the two-part introductory series on risk management; insurance is one of the most popular tools used for risk management. “Big grammar” you say? Ok, I will start from the top.

What is Risk?

In the simplest terms, risk refers to the possibility, no matter how tiny, that an undesirable event will occur. For example, the possibility that one’s car will be scratched by a danfo is a risk drivers in Lagos face every day. Other risks we continuously face include:

the risk of falling ill,
the risk of unfavorable government policies (e.g. the Nigerian government’s recent foreign exchange policy pronouncements),
the risk of being hit by an okada while minding one’s business walking on the sidewalk.

So, life is full of risks – once we are born, we face numerous risks every day, whether we realize them or not; nothing new or special there. Some risks are significant, i.e. have a very high probability of occurrence – how many cars in Lagos have been spared “the scratch”? You get the drift :). While others are not, e.g. the risk of a meteorite falling on your house.

What is Risk Management?

Now that we know that risk abounds everywhere, just like air, we can talk about managing it, as the option of avoidance does not exist. Some people try to make themselves believe they are avoiding risk by claiming “it is not my portion,” but that is about as effective as an ostrich burying its head in the sand to escape from the trouble it sees ahead :). Even if you sit in your house all day every single day, the risk still exists that a plane will fall on your house – minute, but a risk nonetheless.

So, risk management is the process of categorizing one’s risk exposures into various buckets ranging from “significant” to “barely”, and then checking around to determine if there is a way to minimise the possibility of the risk occurring, or finding someone else out there who can do a better job of bearing that risk in exchange for a nominal fee.

“What was that?!” you ask? Here’s the breakdown:

Jummai resumed her first post-graduation job last year, and has been able to save enough money to buy her first car – brand new, cash down. Yippee! She has also been able to save enough to consider making a financial investment.

Jummai is the oldest of her 5 siblings, and has decided to assist her parents by taking on the financial responsibility of her youngest sister’s education; Halima is currently in elementary school, in Grade 5 (or Year 5, or Primary 5, depending on which nomenclature you are familiar with :)).

Her employer recently sent her on a training about personal risk management as part of her professional development curriculum, which she found extremely educational. She is now trying to apply what she has learnt.

The first step she is taking is to list the medium to significant risks she believes she is facing on a daily basis:

health: the risk that she will fall ill and (i) have to spend a lot of her salary on medical expenses; and (ii) not be able to earn her income as the illness may affect her ability to get her job done.
auto: her car may be involved in an accident that may, at best, result in damage to her car, another person’s car, or property. It could also result in bodily injury to herself, or other people.
fire: her car or her residence may catch fire, destroying assets, some of which may be difficult to replace, and some which may be outright irreplaceable.
theft: burglars may break into her home or car and dispossess her of her belongings.
education of dependent: she may lose her ability to earn an income to continue to fund Halima’s education, either due to a long-term illness, a disability, or death.
job loss: she may have her employment unexpectedly terminated by her employer and not be able to immediately secure another source of income.
investment loss: she may lose some or all the money she has invested due to a general economic downturn, or a reversal in the fortunes of the entity(ies) she invests in.

In Part II, we shall look at each of these risks, and explore ways in which Jummai can either mitigate (i.e. reduce the possibility of the risk occurring) or manage (i.e. minimise her loss should the risk occur) them.

Are there any other risks you think Jummai is exposed to that she has not listed here? Please share in the comments box below.

Much Ado About FX (Part III of III): Why Does It Matter?

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If you are just joining the party, it will help to go through:

Now to the final part… Meet the Wazobia family.

The Wazobias love the good things of life. They are very exuberant – work a bit and party hard; some say they work to party :)! They have a lot in their backyard, but they don’t produce much. They have a lot of land and seeds, but they do not produce enough food to eat; they prefer to buy food and groceries from their neighbors. They have a well of black gold, which they fetch from and sell to other families. A lot of essential commodities can be extracted from this black gold, including the fuel the Wazobias use to generate electricity and power their vehicles and machines. The Wazobias have not bothered to extract these by themselves; they find it more convenient to sell the black gold to their neighbors, and then buy these essential fuel commodities from their neighbors when they need them. Every time the Wazobias produce something and sell to their neighbors (exports), they earn xZollers. Every time they buy something from their neighbors (imports), they spend xZollers. Doing business amongst themselves, they spend their local currency, the Waz.

This black gold was very expensive for most of the last decade. Consequently, the Wazobias had been swimming in xZollers. The Wazobias did not utilize these earnings to educate themselves or develop their capacity to: grow their own food, make their own tools, medically treat themselves, and produce their own fuel. Instead, the Wazobias bought even more items from their neighbors, including basic grocery items. Their neighbors loved them because of the amount of business they always brought. The exchange rate between the xZoller and the Waz remained stable because every time a Wazobia needed to obtain xZollers to make a purchase of goods and services from their neighbours, no matter how frivolous the purchase, the xZollers were made available from the Wazobias’ large (and seemingly never-emptying) store of xZollers.

About 18 months ago, the fortunes of the Wazobias changed – the price of their black gold dropped! It was not a small “don’t worry it is just a dip and will pick up soon” type of drop. It was an over 70% decline over about 12 months, with 50% of the decline occurring in less than 6 months. Remember that the Wazobias earned the bulk of their xZollers from this black gold. As they had not invested in being able to be self-sufficient, i.e. produce things by themselves for themselves, the Wazobias found themselves in an unenviable position of having to still go to their neighbors to buy almost everything they need. Now they needed a lot more xZollers than they could earn as they did not have much else to sell to their neighbors other than black gold. As a result, it has become more expensive for the Wazobias to obtain xZollers as it has become rather scarce.

In order to conserve the few xZollers now available, the elders of the Wazobia family decided to impose restrictions on who could come and buy xZollers at a preset exchange rate (official market). They pre-set the exchange rate so as to minimize the cost-increase impact (inflation) on the Wazobia family. There were other members of the Wazobia family (the Cartel) who had their own stores of xZollers obtained from various sources – some legal, some illegal. The Cartel decided to capitalise on the scarcity of xZollers to make a lucrative market of their own (parallel market). Some of the members of the Cartel were even able to access the official market; but instead of utilising the xZollers they obtained from there for the purpose they indicated, they placed them for sale in the parallel market. As we all know, the scarcer an item is, the more expensive it will be; this is called the law of demand and supply. Due to the restrictions placed by the elders, more and more Wazobias trooped to the Cartel to obtain xZollers to enable them keep up with the taste for their neighbor’s goods and services that they had grown accustomed to. Not surprisingly, the parallel rate is now much higher than the official rate.

The Wazobias’ story is the story of Nigeria: the black gold is our crude oil, the Waz is our Nigerian Naira, and we are currently an import-dependent nation. The elders of the Wazobia family represent the CBN, and the neighbors are Nigeria’s trade partners.

If this series has served its purpose, then these news articles should be easy to digest :):

Were you able to make sense of the news articles? Do you still have any questions about any aspect of the Nigerian FX market? Got any recommendations on how the Wazobias can get out of this quagmire? We look forward to reading from you: a comment in the box below or an email to comments@finomics101.com.

Happy new year all! “See” you in 2016 🙂

new-years-eve-in-riverside-pictures-of-fireworks

image courtesy happynewyears2016.net

Much Ado About FX (Part II of III): Nigeria’s FX Market Mechanics

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In the first part of this “Much Ado About FX” series, we got to know what an exchange rate is, how it is derived, and some of the participants in the FX market. Now to the operational nitty gritty of how the FX markets in Nigeria work.

Anyone looking to buy or sell xZollers in Nigeria has three options to choose from:

The official market, aka Bureaux de Change (BDCs)
The parallel market, aka “Mallams”
The private market, aka “Paddy”

The Official Market

Also called the Interbank Foreign Exchange Market (IFEM). Due to the scale of its export-related activities, the FGN, through the CBN, is supposed to have the largest store of xZollers in the country (see Part I for background). This makes the CBN the biggest seller of xZollers in the market. The CBN, however, does not sell xZollers directly to end users (they used to, but they stopped in February 2015); they provide xZollers wholesale to BDCs, who in turn sell to the end users, making their profit by selling at a slightly higher rate than they received from the CBN.

A Bureau de Change (BDC) is essentially any business where people can exchange one currency for another. BDCs are usually located at banks, travel agencies, and airports (source: Wikipedia).

The BDCs are heavily regulated by the CBN, which determines (among other things):

the amount of xZollers they can receive on any specific day
the applicable exchange rate(s) they can buy or sell xZollers
who they can buy xZollers from or sell xZollers to
the amount of xZollers they can maintain in their respective accounts

So, anyone who meets the CBN’s conditions can buy or sell xZollers in this official market.

The Parallel Market

Whenever there is a restriction to the access of a critical resource, a black market usually develops. According to Investopedia, a black market is

Economic activity that takes place outside government-sanctioned channels. Black market transactions usually occur “under the table” to let participants avoid government price controls or taxes … In the financial context, the biggest black market exists for currencies in nations with strict currency controls.

Due to the strict controls placed by the CBN in the official market, a publicly accepted black market, commonly referred to as the Parallel Market, exists. The traders in this market are popularly called “Mallams,” which is a term used to refer to men from the northern part of Nigeria; historically most of them are from this region.

In addition to the absence of CBN controls in this market, some of the reasons the Parallel Market is patronised are:

there are more friendly hours; xZollers can be bought or sold at 10pm on a Wednesday or 7am on a Sunday
it aids anonymity; no form of identification is required, government-issued or otherwise
it is fast; a transaction can be completed in as little as 60 seconds with both parties happily on their separate ways afterwards

Historically there have been times when the “parallel rate” (the exchange rate in the Parallel Market) has been <5% higher than the “official rate” (the exchange rate in the Official Market). At times like this when the CBN restrictions are very tight, the parallel rate could be up to 150% higher than the official rate.

The Private Market

Simbi wants to go to Phuket, Thailand for a much-needed time away. She needs to buy some xZollers to take along for her room & board and other incidentals. Her cousin, Jide, recently received some xZollers as a birthday gift from his mum. Jide needs to exchange these xZollers for Nigerian Naira so he can go to the computer store and buy the laptop he has been wishing for. Simbi mentions to Jide her travel plans and her need for xZollers while on a visit. Jide very excitedly informs her that he has some xZollers he needs to exchange. Simbi cannot believe her luck, and they immediately agree on an exchange rate; Jide gives Simbi the xZollers, and Simbi transfers the agreed-upon amount of Nigerian Naira to Jide’s bank account.

This is the Private Market. The buyer and the seller know each other, privately agree on a rate, and transact their FX trade outside of the other two markets. The buyer is the seller’s “paddy” and vice versa. The volume of transactions that can take place here is negligible relative to the other two.

Hope this helps with your understanding of the mechanics of the Nigerian FX market. Next week, in Part III, we shall go into the “whys”:

why is the CBN taking the actions it is taking?
why are the banks taking the actions they are taking?
why is the parallel rate so far away from the official rate?
why is it so hard for me to obtain foreign currency?

Part I provides a refresher on what an exchange rate is and how it is derived. Do note that xZoller is being used here to represent primarily the U.S. Dollar, but it could also be any other internationally traded currency, like the British Pound or the Japanese Yen.

Still got questions about what you have read so far? You can drop some lines in the comments box below or send an email to comments@finomics101.com.

Merry Christmas in advance! As we celebrate the season, do remember that there will still be life next month and next year, so do not spend it all in December :).

image courtesy express.co.uk

Much Ado About FX (Part I of III): What is an Exchange Rate?

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image courtesy unibank.com

A number of non-Nigerians wonder about the average Nigerian’s “fascination” with foreign exchange (FX) rates, and how when these figures sneeze (change), the entire Nigerian economic and financial systems seem to catch a cold. Many Nigerians do not understand why this number currently seems to be in freefall, and I have heard a number of conspiracy theories related to this phenomenon.

To make sense of all this, let us try to understand what a foreign exchange rate, commonly referred to as “exchange rate” really is.

The xZoller

There is a product called the xZoller. xZollers are used to purchase products and services from other countries. Anyone leaving the shores of Nigeria has to purchase some xZollers to enable them conduct transactions in the other countries they visit. xZollers are also what anyone selling products and / or services to customers in other countries would receive. xZollers are a pretty neat nearly-essential commodity :).

Sellers

Nigerians and companies in Nigeria have a number of products that they sell to people and companies in other countries (i.e. exports), with the most notable being crude oil. In exchange for these exports, we receive xZollers. This means that private individuals, private companies, and the Federal Government of Nigeria (FGN) receive xZollers in exchange for their respective export trades; FGN also receives xZollers from some of its tax receipts. FGN’s xZoller earnings are collected on its behalf by the Central Bank of Nigeria (CBN). So, the CBN and other Nigerian entities in the export business receive xZollers as a part of their everyday business activities, hence are potential sellers of xZollers.

There is another major route through which xZollers make their way into the Nigerian economy: remittances from members of the diaspora. When Nimi – a young Nigerian woman who has recently resumed her new job in Boston, Massachusetts in the United States after completing her university program at Harvard – sends some cash to her mum in Ibadan, Oyo in Nigeria through her cousin who came to visit, she is remitting xZollers to her mum, making Nimi’s mum a potential xZoller seller as well.

Buyers

As mentioned earlier, anyone who needs to purchase goods and / or services from any entity domiciled outside Nigeria will need to obtain xZollers to complete the transaction. So,

Gbenga, who is in school in Toronto, Canada, will need to obtain xZollers to pay his school fees.
Zainab, who owns a manufacturing plant that requires a particular raw material that she obtains from Sydney, Australia, will need to obtain xZollers to pay her Australian suppliers.
Adamu, who purchases cars from a car manufacturer in Tokyo, Japan for resale in Lagos, Nigeria, needs to obtain xZollers to pay the car manufacturer.
Temi, who buys her office shirts from stores in London, UK, will need to obtain xZollers to pay the retail stores.

As we can deduce, there a lot of potential xZoller buyers.

Exchange Rate

Any of these potential xZoller sellers cannot transact business within Nigeria with their xZollers as the legal tender in Nigeria is the Nigerian Naira. So, when the FGN wants to pay the salaries of the federal civil service workers, or Nimi’s mum wants to buy groceries for the house, they will need to find people who would like to acquire some xZollers by parting with some Nigerian Naira. The seller and buyer would agree on how many Nigerian Naira will be exchanged for each xZoller, and this is what is called the exchange rate.

Now that we know what an exchange rate is, how it is derived, and some of the participants in the FX market, we are ready to delve into the mechanics of Nigeria’s FX markets (Part II), as well as the reason why their colds seem to impact Nigerians and the Nigerian economy so severely (Part III). Do note that xZoller is being used here to represent primarily the U.S. Dollar, but it could also be any other internationally traded currency, like the British Pound or the Japanese Yen.

Any questions or comments would be most appreciated, and can be provided in the box below or sent to comments@finomics101.com.

Until next week when Part II comes your way, keep safe, and remember not to spend it all in December :).

Money Basics: Don’t Spend It All in December

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For those of us in Lagos, Nigeria, harmattan – and Christmas – is very much in the air :-). The retailers have put on the show to draw people in and dispense the contents of their wallets, with the “mind-blowing offers,” the “you must haves,” the “must-visit places,” and the “must-do things.” It is very easy to get caught in the commercial excitement of the moment, especially because the capacity to indulge for most is also increased during this period: bonuses, gifts, and most salaries get paid earlier this month. For those who think the Joneses are the gold standard, it is an even more financially hectic period.

Here is a reality check for us all though: after December comes January, and 10 other months before the next December. January is considered by many to be a long and gruelling month, primarily because the duration between the paydays in December and January is the longest in the entire year for most – an average of 37 days according to my guesstimate. It is also because December is filled with so many activities and holidays from school and work, while January is “empty” after the 1st day of the month / year.

Here is another major reason why January is so long: school fees are due at the beginning of that month! For some, rent is due as well; these two items are the largest monetary expenses for a lot of people. In fact, for some, the financial behavior in December ruins the whole year ahead.

So, now that we have identified some of the ways financial problems are created, here are some of my proposed solutions:

Forget about keeping up with the Joneses! This will always be my number one advice because keeping up with the Joneses is not a sustainable basis for getting anything done in life because the truth is the Joneses are clueless and broke!
Image courtesy freedomfromwithin.com

Create an income-expense plan (some people call this a budget :-)). It would interest you to know that income-expense plans have been saving lives and fortunes since the beginning of time! No entity – individual or organisation – can have the kind of lasting progress a lot of us desire without one of these.

View your finances through an annual lens. It is rather easy to focus on the cash inflows and outflows of each month on a per month basis. The reality for most of us however is that both our cash inflows and outflows vary by the month, and this is the case regardless of whether we work for an employer (private or public) or we employ ourselves. An annual view will help acknowledge this reality and make your income-expense plan more representative of your situation. It will also make it a lot easier to appreciate why you cannot afford to spend it all in December.
Image courtesy thinkbeyondthedesktop.com

Save and invest. One of the outcomes of your annual income-expense plan would be the need to save and invest, as some of the current income will need to be put aside to offset an expense later next year.

Remember the reason for the season: giving and sharing our fortunes with those less fortunate than ourselves, i.e. philanthropy. He who gives shall receive even more. Let us not forget those around us who could really do with a little bit of what we take for granted. Instead of buying your child that latest electronic gadget that she does not need, you could buy the monetary equivalent in rice and give to your domestic employees, or even school bags for their kids.
Image courtesy philanthropistlist.com

And lastly, self-discipline. None of the above can be achieved without a healthy dose of self-discipline. We each need to love ourselves enough to be willing to forfeit instant gratification for a greater longer-term purpose. Just as we need to apply this to weight loss and keeping our bodies healthy, so we also need to apply this to keeping our finances healthy.
Image courtesy quotesgram.com

Do you need the assistance of a professional with (i) creating an income-expense plan (ii) creating a savings & investment plan? Feel free to drop me a line at comments@finomics101.com.

It truly is the season to be merry; my family and I wish you and yours the best of the season. Wouldn’t it be better if the merriment lasted all-year-long though? 🙂

Image courtesy motorweek.org

Money Basics: Grooming Money-Smart Kids

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This week is Global Money Week, an annual international money awareness celebration which takes place between 9 – 17 March 2015. Global Money Week engages children worldwide in learning how money works, including saving, creating livelihoods, gaining employment, and entrepreneurship.

Just as important as self-grooming and problem-solving skills, money-management skills are often overlooked during a child’s development, which produces an adult who struggles with her personal and business finances. You may have been that child (who as a grown-up has now identified the knowledge gap and is taking steps to narrow the gap), but there is no reason why your own children should not have a different journey :-). Here are some practical tips to get you and your children / wards started:

1. Develop the ability to say “No”

Courtesy: http://www.keepcalm-o-matic.co.uk

The only reason we have to manage the money in the first place is because it comes in very (some would say extremely) limited supply. If there was an abundance of money available, as there is air, there would be no need to plan (i.e. budget) and save. This is why it is extremely important to say “no” every now and again to (1) your kid’s request, and (2) your impulse to spend money on things your child does not need. It is important to say “no” to these non-needs based requests and impulses especially when you can comfortably say “yes”. This starts to teach the little person that she cannot always get what she wants because resources are scarce, and she has to learn how to be okay with that – the beginning of financial self-discipline.

2. Take them shopping with you

Courtesy: ipadkids.com

If you are like me, the thought of doing this fills you with dread! It is very important though, especially if you are already on the right personal finance path of always preparing a shopping list before leaving home. It is a very well-known saying that kids learn a lot more from what they observe than what they are told. As they watch you prepare your list, making choices between various items and alternatives of items, and then watch you making the live choices at the market / store, which may include some haggling to get the best possible bargain, they are learning that this resource called money is truly scarce, and they have to learn to efficiently allocate it to their various needs and (if there is some left over) wants.

3. Open a bank account for them

Courtesy: moodle.glyndwr.ac.uk

Almost every one of us has a bank account, and almost every bank has an account type designated for young people. Open an account for each one of them as soon after they are born as you can, and develop the discipline to deposit in that account any money that has been gifted to them (during the naming ceremony, for birthdays, when the rich uncle comes to visit, etc). When the child is old enough, usually from about age 5, you can start taking her to the bank to make those deposits herself. So, when she receives a cash gift, instead of allowing her immediately go spend it (or you allow her make you go spend it :-)), encourage her to allow you keep it for her (means you should not spend it either :-)). Also encourage her to keep a record of how much she has saved with you, and on a designated day each month, take her to the bank, let her fill out the deposit forms with your guidance, and deposit the cash at the teller. In addition to setting up the seed of a nest egg for them, you are introducing to them to the concept of saving (delayed gratification), compounding interest (no matter how tiny the interest is :-)), bank products, and helping them establish a banking relationship that they will surely benefit from. Also, most of these accounts come with a membership that entitles the child to periodic gifts and rewards, participation in certain competitions that enhance other skills, and provide access to various forms of educational information.

4. Be who you want them to be

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Courtesy: merelymothers.com

Back to the mantra of kids learning from what they observe rather than what they hear. Your actions and behaviour are the most fundamental lessons your children will learn. This is the reason why you want to start imbibing for yourself the values that you want your children to have. Most of the best money managers we have today were influenced by the relationship their parents / guardians have with money.

Do you have some tips of your own that you would like to share? Do you have any questions pertaining to your own money management style? Have the above tips caused you to identify some money management gaps of your own that could benefit from some guidance? Do drop a line or two below, or send an email to comments@finomics101.com.

Until next time, keep in mind the Global Money Week slogan: Save Today. Safe Tomorrow.

Finomics 101

Finance and Economics for the Common Man & Woman