Personal financial management tips (II)

Last week we commenced discussion on issues relating to employee personal financial plans.

The discussion may be said to be too basic and possibly rudimentary.  But knowledge, indeed financial knowledge is quite important and strategic.  Everyone is indeed in need of money to meet basic necessities of life such as food, shelter and clothing.  The preceding discussions may have served as a revision to some.  We would conclude the discussions on the topic today.  Read on , please!

Savings alone does not create wealth.  What is saved has to be invested in Income yielding Instruments.  Along life’s journey, you will most likely come across some huge sums of money. These may be bonuses from work, profits from a “side hustle,” inheritance, cash gifts, as well as saving account balance. Regardless of the source, it is advised to invest these sums, so they generate additional monies. These monies could be the source of funding for expenses like travelling, luxury goods or even more serious investments like setting up a business.  This is the route to financial freedom.

Under the current system of employee retirement plan in Nigeria, employees are expected to contribute monthly towards retirement benefits particularly pension payment.  The monthly contribution by each employee plus the contribution by an employer are paid in a Retired Saving Account maintained with a Pension Funds Administrator (PFA) invested by the PFA on behalf of the account holder.  The RSA is an account set up for the future, when the employee is most likely not an active member of the labour force. It needs to be taken seriously and this phase in one’s life needs to be properly and adequately planned for. The Retirement Account is supposed to warehouse your pensions. Pension is a regular payment made to an individual, at least 50 years old, who is retired, in Nigeria. In addition, we have a Pension Reform Act (PRA) 2014 that provides the framework and procedure for these pensions. Thus the PRA operates a Contributory Pension Scheme where both the employer and employee contribute a certain percentage of the employee’s salary, every month. Whilst the employee contributes 8%, the employer contributes 10%. These payments are deducted from the employee’s salary account and credited to his Retirement Savings Account, with his Pension Fund Administrator (PFA). The employee can only draw 25% of savings from this account if one has been out of work for at least six months. After that, one needs to wait till age 50 years before additional sums can be withdrawn from the account. This scenario is applicable if the employee worked in an organization with over 15 employees.

In the event that the employee works with a small firm, company or organisation (less than 15 employees), one will need to make private plans for his/her retirement, outside the PRA 2014 framework. Therefore, such an employee can be saving at least another 10% into a savings account, created for retirement purposes. When these funds get to an appreciable sum, they can be used for long term investments, such as Shares, Bonds, and other financial products that fit the purpose.

In the past, Nigeria operated a bit of a dual system of retirement plan.  Employees of government i.e Public and Civil Servants enjoy pension payment post-retirement in addition to gratuity at the point of leaving service.  Pension is a payment given to an employee after he/she may have served an organisation, retire and attained the age of 60 years.  Such payment is made until one dies.

Unlike the Public Service, Private Sector workers are not usually entitled to pension payments.  Instead the varying degrees of monthly pay (the Private Sector Workers in Nigeria earn much more than their colleagues in Public Service) and the terminal benefits paid to the private sector employees possibly compensate for the monthly payment of an allowance called pension post-retirement of government workers.

The major aim or goal/objective of this piece is to advise, guide and direct employees on how best one should plan his/her financial future so as to ensure a bit of a comfortable living during and after a working career.  Pension payment may not be sufficient enough to take care of one’s needs and financial requirements post retirement hence the need to arrange and or organise for other sources of income to argument the pension payment.

In general, individual should plan adequately and appropriate such issues like family, housing, clothing, luxuries such as cars, holidays etc and gifts to extended family members and friends.  One should, in fact must avoid excesses and profligacy.  Flamboyant living is not for a working-class citizen indeed it is also not good for a business person.

One should endeavour to develop and nurture a business not just as a passion but a second or alternate source of income.  This would serve as a cushion to salary income and may become a major source of income post-retirement to compliment the pension if any.  There are quite a number of businesses that can be handled while under an employment contract easily and successfully.

There are quite a number of businesses one can conveniently engage in while on an employment contract which is legally allowed and can be run without interfering with one’s job.  Businesses such as poultry farming, catfish farming, agriculture, snail farming, Beekeeping, animal husbandry etc can be handled effectively and efficiently alongside full employment contract.

It is believed generally that no millionaire is made from one source of income.  Even though an employee may not be aiming to be a millionaire, the target should be financial security and independence as well as freedom.  When a business is started, one should doggedly, diligently and consistently follow up and manage the side business well enough to ensure its survival and growth.

In conclusion, the employee is advised to take Personal Finances very seriously. One is to carefully separate needs from wants, keep track of expenses, ensure good work-life balance, and research ways to constantly grow savings and investments, so that one can enjoy retirement, all things being equal.

“My Lord! Enrich me with knowledge…” (Quran 20:114)

For the Lord gives wisdom; from his mouth come knowledge and understanding (Proverbs 2:6)