How Do I Ensure I'm Never in Debt?

Good morning and how is your week going so far?

Friday letters are usually dedicated to taking questions from our community. Do you have a question for us? Please feel free to?

• send an e-mail to [email protected]; or
• send a DM to any of our social media channels, or
• simply fill out this form. Don’t worry, your responses are kept anonymous.

***

Question?

I’m 21 and a recent graduate. I earn about N70,000 a month. I’m totally clueless about investment and I would like to know how it works.

***

Answer

As a recent graduate in Nigeria, it's commendable that you're thinking about investing despite the current economic situation. However, bear in mind that there’s only so much N70,000 can do with the rise in inflation. It will be wise to upskill or take up side gigs that could augment your earnings. This way, you can save substantially.

Investing is an excellent way to build wealth and secure your financial future. Investing is simply when you buy an asset with the expectation that the asset will earn some profits.?

The assets can be financial assets such as stocks, bonds, cryptocurrencies or physical assets like real estate, etc. Factors like duration (how long you save for), level of risk you are willing to take and liquidity (how easy it is to sell the asset) determine the rate of return you get on your investments. Bear in mind that not all investments give returns as assets could depreciate in value resulting in a decrease in the value of your investment.

However, It is advisable to save at least 20% of your income but if you do not have as many responsibilities yet and you can do more, please do, even if it means cutting back on unnecessary expenses.?

Here's a beginner's guide to help you understand how investment works and how to get started:

1. Understand the basics: Before diving into specific investments, it's essential to understand the basic concepts of investing. Learn about asset classes (stocks, bonds, real estate, etc.), risk and return, diversification, and the power of compounding. Fortunately, MoneyAfrica has a community that is packed with a lot of these resources to help you learn and ask questions when they arise. Click here to join.

2. Set financial goals: Define your financial goals and objectives. Are you investing for short-term goals like buying a car or a house, or are you thinking long-term for retirement? It is always advisable to have long-term financial goals, especially as a youth. Knowing your goals will help guide your investment strategy.

3. Budgeting: Establish a budget to track your income and expenses. Identify areas where you can cut back on unnecessary spending to free up money for investing. Live within your means and prioritise saving and investing for the future.

4. Emergency fund: Now, before you start investing, make sure you have an emergency fund set aside to cover unexpected expenses. Aim to save three to six months' worth of living expenses in a readily accessible account like a high-yield savings account. This way, you are not tempted to go into your investments when any emergency arises.

5. Diversification: Diversify your investments across different asset classes to spread risk. Avoid putting all your money into one type of asset, investment or sector. Diversification can help minimise the impact of market volatility on your portfolio.

6. Stay consistent: Invest regularly and stay disciplined with your investment strategy. Set up automatic contributions to your investment accounts to ensure consistent saving and investing over time. Avoid making impulsive decisions based on short-term market fluctuations.

7. Monitor and review: Although most people skip this step, it is just as important. Regularly monitor your investment portfolio and review your progress towards your financial goals. Analyse and rebalance your portfolio periodically to maintain your desired asset allocation and make adjustments as needed based on changes in your budget, goals or even market conditions.

Remember, investing is a journey, and it's okay to start small and learn as you go. The key is to get started and stay committed to your long-term financial goals. ***

Question:?

I recently started earning a lot, but I am in debt. I am tired of always having debts to pay at the end of the month. How do I ensure I'm never in debt?

***

Answer

Taking proactive steps to address a financial situation like debt is key to building a sustainable financial future. Here are some strategies to help you utilise and plan your finances effectively to avoid debt in the future:

1. Assess your financial situation: Start by conducting a thorough assessment of your current financial situation. What was the money borrowed for and for whom? Calculate your total debt obligations, including credit card balances, loans, and other liabilities. Determine your monthly income and expenses to understand your cash flow.

2. Create a budget: Develop a detailed budget that outlines your income and expenses. Prioritise essential expenses such as housing, utilities, groceries, and transportation while allocating a portion of your income towards debt repayment. Be diligent about tracking your spending and making adjustments as needed.

3. Debt repayment plan: Prioritise debt repayment by focusing on high-interest debt first.

4. Avoid new debt: Commit to avoiding new debt whenever possible. Use cash or debit for purchases instead of relying on credit cards or loans. Think carefully before taking on new debt and consider whether it aligns with your long-term financial goals.

5. Emergency fund: Build an emergency fund to cover unexpected expenses and prevent taking on more debt or reliance on credit in times of financial hardship. Aim to save three to six months' worth of living expenses in a readily accessible account like a savings account or money market fund.

6. Live below your means: Now is the time to avoid lifestyle inflation and resist the temptation to overspend just because your income increased. Live below your means by maintaining a modest lifestyle and avoid unnecessary expenses. Redirect any surplus income towards investments and debt repayment.

7. Automate savings and payments: This is a great financial hack to stay consistent with your investment goals. Set up automatic transfers from your account to savings or investment accounts to ensure consistent saving and investing. Guess what, you can automate debt payments as well to ensure timely repayment and avoid late fees or penalties.

8. Seek professional guidance: If you have tried the above and you still fall short, you should consider consulting with a financial advisor or credit counsellor who can provide personalised guidance and strategies for debt management and financial planning. Please feel free to sign up to our premium plan for a one-on-one session with our consultants using this link.

By implementing these strategies and staying proactive in managing your finances, you can work towards a future free from debt and financial stress.?

***

Would you like to know the state of your finances?

Take this test to see how you are doing financially?

***

Do you know that we have our own podcast? It’s MONEYTALKS!??

Here’s a link to listen to all the amazing episodes we have!

***

Did you find this newsletter useful? Please feel free to share it. You can read previous newsletters here

Join our community today and learn everything you need to know about money. This also gives you access to our monthly webinar series on different topics around personal finance.?

The MoneyAfrica community has so much to offer you in your personal finance journey. Watch this video to find out.?