Do you have a plan for financial freedom?

Do you have a plan for financial freedom?

Nearly everyone aspires to attain financial freedom at some point in their lives. This aspiration is akin to a dream that many harbor. However, only a small minority actually set concrete financial goals for themselves. A goal, unlike a dream, is accompanied by a deadline. It transforms the abstract notion of ‘someday’ into a tangible target with specific parameters in both quantity and timing.

The financial goals of saving N200,000 by December 2015 or earning N10,000 monthly outside of my salary by June 2015 are impressive. However, this is just the start.

Where are you now? How do you bridge the gap between where you are now and where you want to be as expressed by your financial goals?

This is where your plan comes in. A plan is a bridge to your goals (or dreams). If you have a good workable plan that you execute faithfully, the plan takes you across the divide from where you are to where you want to be as expressed in your goal. Working your plan is where the rubber hits the road. Sometimes the goal may change as you get more information. Your plan changes accordingly.

The problem is, most of us do not have a plan, and the few who do, their plans are one sided. They know what to do when the market is up, exchange rate is down, and interest rates are up. They have a bullish plan. This type of plan runs into crisis when the bears show up – share prices crash, interest rates go down or naira depreciates. There is no strategy to deal with these events that are normal market cycles. They start to look for answers in the middle of the road.

Markets go up and down

Every market goes up and down. That is simply the nature of markets. Basing your plan on when the market goes up only is a losing proposition. You will go in when the market is going up and bail out when the market goes down, effectively buying high and selling low. If you are investing in the stock market, you need a clearly defined objective. Are you investing for capital gain or for cash flow? What is your entry and exit strategy? True investors invest for cash flow and pick up capital gain along the way as a bonus. They invest in good companies that are growing, pay dividends regularly and return your initial investment in a predictable time frame. This has nothing to do with what the market is doing. True investors come in when the market crashes, so that they can pick up good stocks at bargain prices – after the traders have fled.

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The news is abuzz with foreign investors fleeing the stock market due to crash of oil prices which will impact the naira exchange rate and ultimately their returns. These are not foreign investors, they are foreign traders who heard there is a party going on in the Nigerian stock market and they swooped in to take part. Real foreign investors take a stake in the companies they are investing in, and are here for the long term.

Investing in a share of a company means owning a piece of that company. If the company is doing well, then why run? If your own business is growing, will you sell it simply because someone thinks it is worth less than what you think? If you have a plan, you don’t care what the market or anyone thinks. You don’t want to run your life based on public opinion.

If you have investments in the money market, the same scenario plays out. The rate goes up and down. Your blood pressure should not be wired to rate movements or you will die before your time. Give yourself a buffer. If the current rate is 10% for example, you can plan based on 7% or thereabout. That way, you are still in good shape when the rate goes down. Also you are not married to one investment vehicle. If fixed deposits are not working for you, you can move your funds to treasury bills etc. Again you still have the option of investing offshore – Ghana, Kenya etc. Foreign investors are not ghosts. They are individuals who scan markets globally and move funds to where they will get better returns. You can explore other markets outside Nigeria, do your due diligence (which may include visiting the broker for a face to face meeting) before you commit your funds. You have to factor exchange rate risks as well, as you will eventually repatriate your funds. There are fund managers in Nigeria that can assist with this.

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You need a plan

It is crucial to have a well-thought-out plan to help you achieve your goals. In order to implement that plan, you will need a steady cash flow. This is why investing for cash flow is essential, especially when you are just starting out. Avoid putting yourself in a situation where there is a lack of cash flow. If you have an idle piece of property, consider ways to generate cash flow from it while you make decisions about its future. Do not make investments based on speculation, rumors, or others’ opinions, regardless of how reputable they may be. If your investment does not produce cash flow, it cannot be considered an asset, regardless of its potential for appreciation. It only becomes an asset when you sell it.

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You need a plan for when the market is going up. You need a plan for when the market is going down. It should not take you by surprise. A market crash is an opportunity to move in. A booming market is an opportunity to take profit and move the money into something else. The velocity of money measures how fast you get your money out and move it into something else.

Every investment needs an entry and exit strategy. When you enter, you put down your money. When you exit, you take back your money and move it into another asset.

Skill acquisition is imperative for these maneuvers. Hence, it is necessary to become an investor before embarking on any investments, just as one must become a driver before taking control of a vehicle. Merely entering a vehicle and commencing to drive without proper preparation would result in unpredictable consequences. Similarly, investing in your financial education before entering any market is of utmost importance. Ensure you possess the necessary knowledge and understanding before diving in. If you find yourself unsure, seek guidance from your banker to determine the most suitable investment options while you pursue further education.

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