Financial Planning with Kalu Aja Lesson 1, Introduction

Welcome to Lesson 1 on Financial Planning with me.
This will only work if you make an effort to implement what you learn here, and make sure you speak with your financial adviser before taking any decisions, Ok.
The ultimate objective of these series are to pass actionable knowledge that allows you understand and implement
First of all, Financial Planning is a process, it never stops. It allows you take decisions about your money regarding how to achieve your financial goals. Those financial goals range from preserving your capital to appreciating your capital to reach an objective eg retirement or children education debt. In taking these decisions you will also have to consider external influences like inflation and interest rates.
There are basic steps in Financial Planning and I list them below
(1.)You establish a Goal, what do you want to achieve ? Short, medium and long term? buy a house? retire?
(2) Then after you have a goal, you work out your assets and liabilities…. Then you determine your networth…..how much are you worth, how far are you from your goal?…write it down.
(3) Crate a plan to reach your goal
(4) Set up a budget to control your plan
(5) Implement your plan
(6) Monitor and amend your plan as events change
But before we go into the step (1) i.e. how to establish a plan, we need to understand how money behaves….specifically how compounding works i.e. how financial assets generate earnings.
(a) So first point; money grows when it receives a return…
N1.00 invested for 55 years at 0% gives you N20, 000 however
N1.00 invested for 55 years at 5% gives you N101, 256
(b) Second point; money grows faster when it compounds faster
Thus if I invest N1,000.00 in a bank and I receive 5% interest compounded quarterly, I will earn more than a similar N1,000 in same bank paying same 5% but compounded yearly.
(c) Third point; when you put money in a bank, you earn more when your money has TIME to compound.
So two brothers got a N2,000 allowance every year. Brother A invested his N2,000 when he was 21 years old, till he became 30, so in total 10 year, he had invested a total of N20,000…got it? His brother invests the same N2,000.00 when he is age 30 till when he is 50, so in total 20 years so he invests N40,000.00 got it?
Assume interest is 8%, Brother A will have N145,841, at age 50 while Brother B will have N98, 846 at age 50…why? Brother A saving had more time to compound, even though Brother B invested more than Brother A…
So in summary, money grows with it earns a return, and compounding works better with time….
So let’s stop here, next week we will look at how to establish a financial plan
Financial Jargon of the week:
A Bear market is a financial market condition in which prices of financial securities are falling…it’s usually a downturn of 20% from the market peak and last for a long period of time. Don’t confuse a bear market with a Market Correction, which is a 10% fall and has a shorter duration in time…
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