Are you ready for the looming recession?

JANUARY 7, 2015 BY USIERE UKO 0 COMMENTS

   

 

 

Author and personal finance expert,USIERE UKO, writes on building strong foundations to weather financial storms

The fact that we are in for a rough ride financially as a nation is no longer news. The nation was caught napping with low reserves when oil prices took a free fall, crossing the $50 line briefly on Monday and dragging down world financial markets with it. The naira is in for a serious bashing as the Central Bank of Nigeria is not ready to exhaust our depleted foreign reserves fighting a battle it knows it cannot win. Recession like storms come and go. Financial storms come to test your financial foundation. If your personal finances go into a recession simply because you lost your job or business is down, then your financial foundation is not solid. If your standard of living goes down because you lost your job or business is down, then you are building on sand financially.

Individual financial circumstances may differ, but the principles of building a solid financial foundation remain the same. Individuals and organisations need financial stability. Our standard of living should not be exposed to external circumstances. That is why it is very unwise to build your life around one source of income, or to raise your standard of living when one source of income goes up. Your primary source of income should come from passive income, not earned income. Even if you have a good paying job, your job should be to convert your earned income into passive income. Your rate of wealth accumulation is measured by how much of your earned income return to you as passive income – income you do not have to work for.

Your home is primarily a shelter, a shelter from storms which include financial storms. Your monthly expenses are more or less fixed, going up at predictable intervals e.g. house rent, and school fees etc while your family have come to expect a certain standard of living. If there is a change, it should get better; nations maintain foreign reserves, the recommended level being the equivalent of six months of imports. For individuals, it is the equivalent of six month’s income. The challenge is; after six months then what? The idea is that you will get another job by then. What if you don’t?

For the financially literate, six month’s reserve is just the start. Having the reserves generate enough income to live on is the first goal. If all you have is six month’s reserves, living on it means depleting it. It is not sustainable in the long run. When you are generating enough to live on, you can go on indefinitely as you are not touching your capital. You are living on your interest. There are folks who have moved to the level of living on their interest. Their interest generates enough returns to live on. I know some businesses that earn enough interest income to foot their payroll. Such businesses do not need to downsize when storms hit. They can afford to focus on growth instead of survival.

Whatever your current financial circumstance, you have to run a check on your financial foundation. The rains are here, but it is not too late to check your roof. You will get soaked for sure, but the damage will be reduced if you take remedial action now. You should have done it earlier, but there is no point crying over spilt milk. If you are in a financial hole, the first thing you need to do is to stop digging. If you have no reserves, you need to start building one. The starting point is learning and then doing, starting with what you have.

For many people, the first inclination is to start a new business, and those owning existing businesses to invest more money in their business. The first step should be to get the fundamentals right, build a solid financial foundation under what you have already. The skill for starting and growing a business is different from personal financial skills. However, if you don’t know how to manage your finances, your business will suffer. Many businesses fail because their owners do not have a solid financial foundation. Many entrepreneurs start drawing a salary too early, as they need it to survive.

Three plans make up a solid financial foundation; I chose to call it the financial security plan, financial growth plan and financial abundance plan. The most critical plan is the financial security plan. Your goal in the financial security plan is to achieve financial independence. When you are just starting out, your logical first step should be to build your financial security portfolio, this means investing in fixed income assets which have zero risks, like most money market instruments such as fixed deposits, treasury bills etc. Based on the amount you have available for investing, you can allocate your funds to other plans. The growth plan includes investing in markets like stocks, real estate, forex, commodities, precious metals etc. The abundance plan includes high risk investments such as starting your own business and investing in a startup it. This is the icing on the cake. This is where fairy tales are made. You can become rich beyond your wildest imagination, become stuck or go bankrupt if your security plan is shaky.

It is unwise to start a business if you do not have your financial security plan in place. If your business is what will feed you, pay your house rent, children’s school fees etc, then when that business sneezes, you catch cold. You will starve that business of funds because when you are supposed to reinvest, you are pulling out funds to ettle personal bills. When your business and personal finances intermingle, the business will go down and you may end up having to look for a job. Of course if you are still living with your parents who house, clothe and feed you, you can afford to put all your eggs in one basket – the business and if it crashes, your parents will help pick up the pieces. In that case, your parents are your financial security plan.

Financial crisis is essentially feedback. Most people are hostile to feedback. They push back, ignore it, quarrel with the messenger, find fault with the manner of delivery, and anything but examine the content of the feedback. A school inspector comes to check things out and give feedback, not to punish. A good principal studies the feedback, asks questions to understand what is unclear and goes to work on the deficiencies. Such school will do better at the next round of inspections. If storms blow your roof off two or three times, there is something you are not getting right.

You can make the decision to learn from the coming storm, eat the humble pie and start from the foundation, so that when the next storm comes around, you are ready not just to survive, but thrive.

• For questions and comments, you can contact him at usiere@gmail.com

 source;PUNCH.