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Six laws of wealth

1st of two parts

A friend shared a slide entitled, “6 Laws of Wealth”, originally from a site advocating young Nigerians to save for their future. The subject matter is certainly interesting and relevant to the objective of gaining proficiency in personal wealth management. It’s quite timely too as we aim to recover financial lost ground in the near future. Let me therefore elaborate further on this topic.

Law # 1: Keep a part of what you earn. Establishing an effective savings habit requires several actions and resolutions. One, save first and only spend what is left. Those who reverse the sequence will not succeed. Two, be a disciplined saver. Contribute like clockwork and avoid the temptation to spend compulsively. Three, have a long-term savings mentality. Align your savings to important future goals like owning a house, family travel, retirement, old age care. Four, have forced-savings instruments. An ATM account is a liquidity instrument because its primary use is for withdrawing money on demand. On the other hand, a whole life insurance policy provides both financial protection against unexpected circumstances as well as a savings feature that progressively builds up funds for the future. Remember: it is not how much you can save that is important; it is how much you can keep saved.

Law# 2: Put your savings to work. In today’s low-interest rate environment, ordinary savings earn either negligibly or not at all. Eventually, you need to consider investing when your savings are sufficient and your income is protected against unexpected loss. The basic rule to observe is the risk-return principle where earnings are commensurate to the riskiness of the investment instrument. For example, time deposits and bonds are considered lower-risk investments because they offer a fixed rate of return. Buying and selling stocks, on the other hand, are considered higher-risk investments because the yields can move up or down, depending on market forces. An investment claiming high returns with very little risk violates the risk-return principle and is most likely a scam; do not fall for such schemes. Don’t exceed your risk appetite. Invest only in securities you are comfortable with. Second, diversify in order to build a balanced portfolio. Investment diversification is done in two ways, one, diversify by asset class, meaning, select different categories of investments, and two, diversify by tenor, meaning, take both short-term as well as long-term investment positions. Finally, owing to the much broader and more complex nature of investing, be an educated and well-informed investor. Learn what you can about the nature of various offerings. Moreover, engage the services of trusted professionals and institutions with proven expertise to be your advisor or fund manager. As the stuntman’s warning declares, “Do not attempt this without proper supervision”.

Law # 3: Avoid debt. Here’s a thought-provoking quote: “The poor pay interest while the rich earn interest”. Incurring debt is probably unavoidable at certain stages in your life. To owe money is not wrong per se, for as long as you can manage it well and avoid getting into unnecessary debt. Never borrow for frivolous purposes or out of a desire to keep up appearances. Debts are obligations that impose an extra premium for the privilege of using somebody else’s money. Know exactly what you can and cannot afford, both presently and in the long run. Instalment purchases, for example, immediately create debt while appearing to be seemingly affordable because of the extended payment terms. In the end, however, you may end up paying more than double the cost of these items because of interest charges.

Therefore, live within your means. Don’t spend at the peak of your earning power; this is how most people end up mired in debt – by borrowing excessively to support unsustainable lifestyles. Rather, throttle your expenses down a couple of notches. In so doing, you can minimize, if not avoid, incurring debts altogether and still manage to live well.

I will take up the last three laws in my next column. In the meantime, I invite you to think about these points, share and discuss them with others and, best of all, add your own thoughts and nuggets of wisdom.*

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