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Tuesday, January 18, 2022

Year 2022: Ready…Set…Run! Goals to help you set the new year straight

You made it, and you are here. The year 2021 is coming to a close. It’s essential you close out your finances in a systematic and organized manner that allows review, introspection, and planning for 2022.

2022 will come with new opportunities and taxes. The world has changed, and spending and working have also changed. More digital opportunities now exist to earn, save, spend and invest. Take banking, for instance. If you live in Nigeria, you can use digital currency, eNaira.

There are also digital banking options like Kuda Bank. What about investing? You can stake your USD stablecoins on an exchange like Bybit and earn inflation-indexed returns. What about credit? You can apply for a loan from Carbon, pay later by using a Buy Now Pay Later service like CreditClan and get a credit score from CRC Credit Bureau, all from Nigeria..

Let us review for year 2021 and plan for 2022. Along with these topics:

I. Income
II. Spending
III. Budgeting
IV. Debt
V. Net worth
VI. Retirement plans
VII. Target savings
VIII. Insurance
IX. Investment
X. Estate plan
XI. Giving

So, what were your financial goals? Did you achieve them?

2021 Review

• Income

Did you increase your earnings in 2021? Was this change to your active or passive income? Did you have multiple streams of income? The long term goal in personal finance is to have your non-discretionary or necessary expenses entirely covered by your passive income.

• Spending

Did you track your expenses at any time during the 2021 year? Do you know where all your earned funds went to? What are your top three expense items? Did you have a plan to reduce them? How? Every financial plan starts and ends with your spending patterns and priorities. The spending review is of primary importance and sets you up for success or otherwise in 2022.

• Budgeting

Did you set up and use a budget this year? Was your budget on average surplus or negative compared to your initial projections? What periods did you identify significant variances from your budget projections? Why did you have a surplus or deficit? These reflective questions allow you to determine the factors that led to your budget success or failure.

• Debt

By percentage of income, did your debt go up or down? It is essential to look at debt compared to income and measure it as a percentage of active and passive income. This analysis lets you determine how “geared” you are. 2021 saw a lot of job losses. Did you take on new debt? Or did you pay off existing debt? Regarding the cost of the debt, has your average Annual Percentage Rate (APR) gone up or down? The APR represents the total cost of the debt you hold.

• Net worth

Did you reconcile your assets and liabilities, broken into income-generating and interest-bearing liabilities for 2021? Did you become wealthier, i.e., did your net worth rise? Why did your net worth increase? More assets or fewer liabilities or both? If you took on more debt, it is preferable to see that debt creating new assets, e.g., new mortgage loan creating new property holdings.

• Retirement plan

A defined contributory plan is mandatory for all formal employers to offer their employees in Nigeria. A defined contributory scheme means your final retirement amount is based on your contributions during your working life. With higher inflation in Nigeria, the cash returns on RSAs would have a lower purchasing power today than at the beginning of the year. It would help if you made additional voluntary contributions to your RSA to take advantage of tax-free compounding. Your final pension payout should be enough to fund at least 50% of your expenses during retirement. You can calculate how much you need in retirement using a Present Value of Annuity stream of payments. Making annual adjustments ensures the gap between your final annuity payout and contributions does not become too broad.

• Target saving plans (TSP)

Did you have a TSP? Do you have an Emergency Fund? How many months of your non-discretionary expenses do you have saved up? With inflation at double digits, you need to increase the funds saved, maybe add another month.

• Insurance

If you have dependents, you must have life insurance to protect your dependents from loss arising from untimely passing. Remember, it’s income loss being insured, not life. Also, as you get older, start to look up long-term medical care plans, and the premium charges are cheaper when you buy early on, when you are healthy.

• Investment plan

How did your portfolio perform in 2021? If you invest in Naira, you have to earn a return of 15% to avoid losing value due to inflation. That is a lot. Is your portfolio making inflation-adjusted returns? Have you considered diversification? Have you considered meeting with a professional and reviewing your portfolio concerning your risk profile and objectives? Did you hedge your Naira portfolio with foreign currency earnings? Are you investing in riskier assets like cryptocurrency? Keep in mind that your investment plan exists only for you. If your goal is to generate income without risk, then earning below inflation is a success according to your plan.

• Estate plan

The end of the year is always a good time to review next of kin information, look at benefits at work, and ensure you have accessed them. It is imperative to organize, protect your assets to ensure your named dependents remain in control of your assets without excessive dissipation. Did you write a will?

• Giving

2021 shows us that there are no islands of self-sufficiency. We all need each other. Giving is essential to the soul, but it’s also tax-deductible. So give. Support your schools or the orphans; making the world better is best for everyone.

2022 Checklist

• Taxation

2022 will see an increased focus on taxes and compliance; get prepared.

1. Increase your contributions to your Retirement Savings Account (RSA) via Additional Voluntary Contributions (AVC). Penson Contributions are tax exempt.

2. Open a new healthcare insurance account or increase your NHIS/Private Insurance coverage as expenses incurred for medical care and insurance premiums are tax-deductible.

3. Look to buying life cover or annuities as premiums paid for those policies are also tax-exempt for you and your spouse.

4. Get an employer-funded loan to buy a primary residence as these and mortgages are also deductible. Also, National Housing Fund (NHF) contributions are deductible.

5. Start a business, register a business, start small. It has tax advantages including deductions on rent paid on business premises, interest on borrowed money, and repairs and maintenance expenses on business assets.

Transfer the personal car to business, and deduct car maintenance and upkeep as tax-deductible items.
Begin writing out your annual financial plans. A financial goal is a statement of economic intent, with figures to make it measurable and a date to ensure a target. I list sample financial goals below in no order, and you can edit them to suit your needs.

2022 Goals

Goal 1: Reduce my interest-bearing debt by 10% by Q2 2022.
Goal 2: I plan to set up an emergency fund of 3 months non-discretionary expense by Q2 2022.
Goal 3: Build passive income that covers 10% of my discretionary expenses by 2022.
Goal 4: Increase my retirement saving by 10%, starting by Q1 2022.
Goal 5: Reduce my discretionary consumption by 20% and channel saving to my investment account by Q2 2022.
Goal 6: I plan to register a business by Q1 2022 and start operations by Q3 2022.
Goal 7: To organize my assets and liabilities in an orderly, legal way by Q1 2022.
Goal 8: Plan and protect my income generation ability, buy insurance, update my next of kin information by January 30th, 2022.

In closing, remember planning is the first success.

BFIA Admin
The big boss.

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