Your salary. Is it really yours?

Before you read this post, please take a minute to read my previous post "Life Cycle of a Lagosian" available here. I'd like to say thank you to everyone who read that article and asked for a continuation through comments, mails and calls. It took me some time to get this together (especially the investment calculator). Enjoy!

If you are a employee like I am, then you probably look forward to the end of the month when you'll get paid your salary. Depending on where you work, what you do and what post you occupy, your salary will vary from several thousands to several hundreds of thousands and possibly several millions (I wish that was me!). Yeah, some are that lucky, but everyone still falls into the same category. If month end does not come, you don't get your money. But hold on, did I say "Your Money"? I think not!

The truth is that for many people, their salaries don't really belong to them. It belongs to other people. A typical employee's salary would end up belonging to several people which might include a Landlord, Car Dealer, Washman, Shopping Mall (e.g. The Palms), Market (e.g. Tejuosho), Fuel filling stations, Auto Mechanic, Nepa, and just about anybody who provides goods or services in exchange for money. Unfortunately, for many people especially Nigerians in Lagos, they think the money is theirs. Without meaning to, they unconsciously spend part of that money everyday on one expense or the other. Day in, day out, someone collects his own share of that money. Suddenly, 2 weeks after payday, they check their bank account and discover their salary is almost gone and they begin to wonder how, when, where, why ... the simple truth is this - it's not their money.

Some people do better. They put aside a certain amount every month and save. If you fall into this category, I'll congratulate you on a good initiative. However, I'll still tell you that the money does not belong to you. Saving is good, don't get me wrong, but it's not good enough. Let's take the case of a typical worker who is disciplined enough not to delve into his savings at the slightest sign of rain and he has managed to save N100000 over a year. If he saved this money in 2006 at a rate of 3% per annum (which is the best he can get from most banks), he'll have a total of N103000 at the end of the year, with a "gain" of 3000. Now, a recent analysis showed that in 2006, the inflation rate of the Naira was 13.5%. Translation: Your money has increased by 3% but it's value has decreased by 13.5%. In other words, what you used to buy for N100 now costs N113.5. Technically, he has gained N3000 through saving, but in the real world, he has lost (N13500-N3000) = N10500. Who now owns the money? The economy! - another money collector which collects it's share of our money.

What then exactly is my money? My simple definition is this "Money that belongs to you means money that's working for you". Defining "Money working for you" brings me to the subject of Investment. Many people think investment is for the stockbrokers, business owners or people with large amounts of money, they're wrong because everyone ought to be an investor. Before your money can start working for you, you have to be an investor. Now stop reading and think for a few minutes, because your next decisions might change some things in your life.

I assume you've decided to become an investor so you can have money working for you. Congratulations because that's one of the best decisions you'll make on your path to financial freedom. Like in the previous article, I'll give you some tips.

1. Start with a plan. Good investors always have a plan. Make it detailed but not too rigid. Ask yourself this question. How much will I need to survive each month if I want to live comfortably? This is the amount you'll need per month in order to be financially free. Write down your answer. I'll call this value the "break-out value".

2. How much you can invest per month?: Decide on an amount of money you can set aside from your salary every month for the purpose of investment. You are not allowed to go below this amount, however, you can exceed it. Write down your answer. I'll call this the "Monthly Contribution".

For the purposes of this article, I've created an investment calculator that can help you see the advantages of investing. Click on the button below to open the calculator in a new window. Enter your "Monthly Contribution", "Interest rate", and "duration". Finally, click calculate to get the final value and the breakout value.

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Let me illustrate with an example. If I contribute N10000 monthly to an investment that yields 20% per annum and I decide to continue contributing for 5 years, then at the end of 5 years, I'll have a total of N1071590 (roughly N1M) and I'll be making N17859 monthly for the rest of my life without have to make any more monthly contributions. (Note that this amount exceeds my initial monthly contribution). Yes ... I know you're going back to try the calculator again ... and you're probably wondering how come you didn't know this all along. Feel free to try with different values for duration and monthly contribution. The final value of N1071590 is what I call "Money working for you" to produce N17859 monthly. Simply put, you can pay yourself a salary of N17859 every month without having to work for it.

I've probably got your brain working overtime now ... just go ahead and transfer your thoughts to paper and actions. Get your plan straightened out and make sure you write them down. There's no specific format for the plan but try and make it something you'll understand easily. Note down the "monthly contribution", and when you want to break out. Include any other thing that might help you to keep to your plan. Remember the previous tips "Have a good reason" and "Have lots of determination"

Now here comes the tricky part (and the practical part). How can you find an investment that will gurantee you at least 20% per annum? Good news! There are many, each with a different level of risk and credibility. But be rest assured that it's possible to find such an investment with minimal risk. I'll talk more on that in my next article in this series. Watch out.

Yours in the race,
Tayo