Personal Finance: Setting Up Firewalls

Dear Reader,

Firewall and Finance? Who you? Where are you from? *in Indabosky's voice*. Simply put, "What’s the relationship?". There is actually a connection between both terms, which will be explained in this article. 

When we think about Firewalls, we think about it's science, which refers to a network security system that monitors and controls incoming and outgoing network traffic based on predetermined security rules. I know that may be a lot of computing jargon, but stay with me, let’s think it through the Finance K.I.S.S way. Personal finance refer to financial management strategies, which an individual performs to budget, save, invest and spend resources over time, taking into account various financial risks and projections.

To juxtapose personal finance and a firewall, in my opinion, a common link is strategies put in place to protect something – in this case your money. As a Firewall would, these strategies controls your financial inflows and outflows based off your earning capacity. Other important inputs that guide personal finance depends on the individual’s risk appetite, preferred investment options, personality, overall life outlook and future projections.

These other inputs are further simplified and are dynamic per person. Let us say an introvert who is risk averse and has little or no finance background. This person will prefer to save his/her money (inflows) in a savings account and make plans for the future based of what he/she can save. Per research, most Nigerians are risk averse, that is, they will not invest in risky assets even though there will be greater returns. Also, another study states that a large percentage of Nigerians believe the Y.O.L.O principle, which summarized is “you are only assured of today, so chop the life of your head!” J

In the same vein, a recurring question I got after my “Staying afloat: Finance K.I.S.S” was on personal finance strategies and investment options. The strategies I have implemented over the years and advised others on, which worked to setting structures around their finances, include the following:

• Setting out percentages on your income based on priorities (savings, investing, capital expenditure, contingency and current/monthly expenses);
• Setting out contingency funds for unforeseen circumstances especially in a liquid investment fund like mutual funds;
• Analyzing personal risk and expected return appetite to know where you fall – risk averse, risk neutral and risk seeker;
• Personal preference on different investment options, ranging from mutual funds to REITs;
• Level of inflows and sources of income; and
• Percentage of fixed expenses to total inflows.

In addition, investment options have different characteristics, timelines, returns and risk levels. These investment options range and summaries are listed:

• Mutual Funds – this is an open-end pool of funds from many investors to purchase securities. The different deposit money banks have different mutual fund options, which are categories in equity, fixed income, money market or a mix of all (hybrid) in different currencies dollar or naira funds. (search for top mutual funds in Nigeria, I suggest Stanbic, FBN, AXA Mansard, Cordros Mutual Funds amongst others. This can be used as a contingency fund as it is liquid. (Redemptions are processed within 4 hours and they have a 5 – 7% interest);
• Arbitrage Trading – this refers to purchasing a stronger valued currency in anticipation of an increase based on economic projects. A current example is the purchase of dollars before the pandemic, the Naira value was NGN365, but now at NGN465. The arbitrage gain here is NGN100 per dollar purchased;
• Agriculture investments – this refers to pooling funds for investment in agriculture ranging from infrastructure to crops over a period of time. Notable agriculture investments are Farmkart, ThriveAgric, Farmcrowdy among others. This ranges from medium to long term (6 months to 2 years), with high returns from 14% - 30% interest;
• Hybrid Investments - New savings and investment platforms – this refers to interesting savings and investment options built of the culture of Nigerians and a mix of flexible savings, investment and loan platforms. Major examples include Piggyvest, Cowrywise and Renmoney;
• Cryptocurrency Trading – this refers to speculating cryptocurrency price movements via a CFD trading account, or buying and selling the underlying coins via an exchange. This investment is volatile and many investors rely on hardware wallets that store the digital assets. In Nigeria, many investors are risk averse and shy away from the perceived hacking risk, but as I had earlier said, the higher the risk, the higher the return;
• Real estate investments – this refers to investing in a company that owns, and in most cases operates, income-producing real estate. Real estate investment trusts may own many types of commercial real estate, ranging from office and apartment buildings to warehouses, hospitals, shopping centers, hotels and timberlands; and
•  Other investments include buying and trading shares, commodities, derivatives, cooperative savings, digital bank savings platform (ALAT savings & V-Bank’s veelage) etc.

In conclusion, Warren Buffet advised on personal finance tips, which will in the long run increase our money or net worth millions or billions if followed through. He talked on five key areas, which are Risks, Earnings, Savings, Spending and Friendships as enumerated;

• RISKS: “Never test the depth of the river with both feet”. This means, don’t take extreme risks;
• EARNINGS: “Never depend on a single income. Make investments to create a second source”. This means, we should invest from our salaries or primary source into other businesses;
• SAVINGS: “Do not save what is left after spending, instead spend what is left after saving”. This means we have to implement structures stated in this article and spend amounts set aside for monthly predetermined expenditure;
• SPENDING: “If you buy things you do not need, soon you will have to sell things you need”. This refers to spending within budget, except for contingencies, which will be covered by your fund.
• FRIENDSHIPS: “It’s better to hang out with people better than you, pick out associates whose behavior is better than yours and you will drift in that direction”. Always seek to relate with people better than you by networking.The Yoruba’s say when a leaf sticks to a soap, it becomes like a soap, soapy. LoL. J

Stay Safe, as always!

Aramide.