Monthly Archives: January 2016

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

This current article about being an immigrant is about what economic migrants aim to achieve by migrating and why we sometimes fail at this goal. I have chosen to refine my definition to economic migrants given the current debate about refugees and other types of immigrants.

Economic migrants are individuals who leave their country or region of birth primarily for the purpose of economic advancement for themselves and their families.

During a recent discussion with other economic migrants, as is usually the case with these meetings, the conversation drifted to the topic of returning “home.” As the people around me discussed the merits and demerits of returning home, I thought about the practicalities of returning home. Were many of us to return home, we wouldn’t be significantly financially better off than we were when we left. Given this, could we say we had achieved our goals as economic migrants? Probably not, if compared to peers that didn’t migrate.

After confronting this stark reality, I started to think of reasons why economic migrants may fail at achieving their goal of economic advancement, particularly in the United Kingdom (UK). There are some factors which I think could be generic to most people, some factors unique to African migrants and some unique to immigrants to the UK.

One of the factors peculiar to African migrants is our general lack of awareness about debt. African societies are largely cash-based societies with limited access to credit. If you wanted to buy something you couldn’t afford, you saved for it rather than buying it on credit. Credit is considered a bad word. There was a popular sign in most Lagos corner shops that said: “No credit today, come tomorrow.” On arrival in the UK, many of us treated our credit cards like cash and we bought things we couldn’t afford incurring lots of interest charges along the way.

Another area in which this lack of debt awareness manifests is in the way we handle our mortgages. Many of us still don’t understand that a mortgage IS a debt facility, and the sooner you pay it off, the less interest you will pay overall. There are many differing opinions about this though, such as putting the potential over-payments in alternative investments with better yields. [Finomics 101: alternative investments should only be embarked on after thorough discussions with your financial adviser, so the risks involved are properly understood.]

Another African migrant feature is “keeping up with the Joneses.” In Nigeria, your success is usually measured relative to your peers. It usually never matters how well you are doing as a person if X is doing better than you. Everyone does it. From parents comparing siblings to colleagues comparing themselves to each other. This ends up creating a high level of insecurity in most individuals, forcing people to acquire items they do not need just to be considered to be well-off. So, a lot of migrants end up spending significant portions of their hard-earned money trying to “keep up with the Joneses” in their church, in their extended family, etc. I acknowledge this is worse in Nigeria. Personally, I adopt the old saying “comparison is the thief of joy.”

Yet another African-immigrant factor is our religious hopefulness. Most African migrants are very religious which makes us very hopeful and positive, but ill-prepares us for adversity. While I appreciate different religious beliefs, the fact is that there is no job security in the western economy and job losses can happen to anyone, and did happen to many during the 2008 recession. Given the cyclical nature of the western economies [Finomics 101: this applies to all economies], most of us should prepare for such uncertainties by saving and being conservative with our earnings, but this is hardly ever the case.

Lastly, a factor that is subject to debate, and from my personal experience appears to be unique to African and maybe Asian societies, is the sense of communal ownership of personal property. Western cultures are very individualistic, meaning your fortunes and woes are largely attributed to you. This is generally not the case in Africa: the idea is that if you are materially successful, the fortune is to be shared with the community and if you are in financial difficulty, the community will bail you out. As my mother usually says, “ajoje lo ma n dun” meaning you shouldn’t enjoy your good fortune alone. Another local parlance is “chop alone, die alone.” What this attitude creates is a sense of entitlement and a something-for-nothing culture. People back home feel entitled to ask migrants for financial support and should the migrants refuse, they are seen as reneging on this societal contract. The reason I say this is subjective is that it is up to an individual to decide which requests they fulfil, and which ones they ignore, but the societal contracts make it okay for people to keep asking without offering anything back in return.

Moving on to the factors peculiar to the UK, career progression is harder in the western economies because they are inherently more competitive. There are more people, both indigenes and migrants, competing for the few positions at the top; as a result, there are many factors that can be used to discriminate against individuals including race, gender and class, which is why successful African migrants such as Tidjane Thiam are a rarity in the UK.

Another factor unique to the UK is the possibility of getting complacent. Thankfully, in the UK, we don’t pay at the point of use for healthcare, education and social amenities like security. However, this means that even if you are out of a job in the UK, you can solve your healthcare problems and send your kids to school. This contrasts sharply to Nigeria where you have to fund these yourself at the point of use, and you really can’t afford to be broke as you or your kids may die as a result. I am not saying this is ideal, but it creates an element of drive which most individuals living in the UK don’t have.

Another UK factor is the cost of living. The cost of living in the UK is significantly higher than the cost of living in Nigeria and even the United States of America (US). These include the higher taxes (to offset the free healthcare, education and security) and the high cost of necessary infrastructure such as energy (including heating in the winter), water and transportation which are provided by private companies trying to generate a profit.

The last factor, which can totally be avoided, is Consumerism. Many African migrants came from an environment of poverty and were suddenly thrust into this world where you could have it all for a price. We mostly forgot our humble beginnings and we consumed it all, spending most of our earnings along the way. We adopted the Western mantra of living in the moment and letting the future take care of itself. We didn’t think of how to preserve our wealth for our retirement and the future generations.

I would like to end by saying there is still hope for us and for our children to achieve the goal of economic advancement, but we need to expand our financial knowledge and become more self-disciplined about our economic goals.

The author, Mrs Fad, is a wife, mum, and economic migrant who departed her home in Nigeria for the United Kingdom 10 years ago.

* featured image courtesy www.keatsconnelly.com

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.