Money Management 001: Key Principles

A wise man once said money is a traveler that should be caressed and held unto closely.

A wise man once said money is a traveler that should be caressed and held unto closely.

Some say he said so mainly because he had learnt over time that it is easier to spend money than it is to make money. For the purpose of this series, our deduction should be tilted towards the understanding that money is a very important topic and individuals should study its management.

It makes a whole lot of sense to learn how managers of money (banks, asset managers etc.) actually operate and reason. It should therefore not be shocking that this series will rely from time to time on the regulatory requirements of banks as well as their operational realities.

It is imperative to establish, for understanding, some key principles of money management:

–          Budgeting – Planning is a necessity. Every money manager should at every point in time have a forecast of incomes and expenditures.

–          Liquidity – The liquidity ratio prescribed by the CBN is 30%. Deposit Money banks (DMBs) are required to have immediate access to at least 30% of their Naira deposits at every point in time. Banks usually do this by keeping this ratio of deposits in liquid assets (Vault cash, Treasury bills, CBN balance etc.)

As an individual manager of money, you should take a cue from the regulatory stance. Strive to keep at least 30% of your available cash liquid (i.e. readily accessible). It always makes sense to put aside a portion of your total net worth in liquid assets (including treasury bills, fixed deposits and cash balances).

–          Asset Diversification – Seek to adopt a balanced approach to investing. Endeavour to ensure that your investment portfolio is well diversified:

  •  to ensure sufficient liquidity and to provide for the future;
  • to protect a significant proportion of your holdings while taking enough risk to earn higher returns;
  • to reflect a balance between local and offshore investments.

–          Performance Assessment – In order to drive value generation, it will make sense to have targets for return on investment (to be reviewed periodically).


FOOD FOR THOUGHT

  • Discipline is a very integral part of money management
  • Establish a seed amount. Aim to invest 70% of your disposable income for a defined period in order to grow your initial seed. After this period, aim to re-invest 100% of your seed income while reducing the inputs from your disposable income.

    Grow the seed.