Notes on Some Basic Principles of Financial Literacy
Mission of these notes?
· To empower you by God’s grace with the tools for a systematic and halal (Islamically ethical) way to greater financial independence & security
· To ensure you cannot say down the line of life that you wish you knew what your well-off colleagues knew that made them wealthy
How wealthy are you? Do you even know?
It’s not how much you make that determines your financial future, but how much you keep and invest.
One critical question!
If you were to stop working today for any reason, for how many months would your wealth be able to support you, at your present standard of living? So, you may not be as wealthy as you might have thought.
Why Financial Wisdom?
Without financial wisdom, money or wealth is quickly lost by those who have it. But with financial wisdom, wealth or money can (by God’s permission) be secured by those who do not have it.
“Man will have nothing but what he strives for” (Qur’an 53:39)
Seize the Moment & Prepare: The Prophet Muhammad once said: “Take advantage of some five (things) before some five (others): your Life before your Death; your Good Health before your Ill-Health; your Free Time before your Pre-occupation; your Youth before your Old-Age; your Wealth before your Poverty.”
Anticipate the difficulty by managing the ease – “Be Prepared!” (Boy Scouts motto)
“The deeds most loved by Allah are those done regularly even if they are small” (Hadith)
· Unfortunately we are often discouraged because we exaggerate the amount of resources we actually require for wealth building. The truth is that wealth is actually built from little gains of consistent investments.
Some Basic Definitions
· Asset – whatever brings money into your pocket – E.g. Business shares, stocks, real estate, investments, etc.
· Liability – whatever takes money out of your pocket – E.g. Bills – GSM, electricity, water, school, feeding, DVD, fees, transport, rent, etc.
What route does your money take? For many people, all their income (salary, gifts, etc) goes to the bank for a while, before they spend it all. They work for their money!
What route should your money take? At least 10% of your income should go into assets (or investments) until ultimately your investments are paying you more than you can earn on your job. Their money works for them!
· Good is the enemy of the best: Being satisfied with what is good enough or adequate may prevent you from looking for what is better or best. Compare “Returns on Investment” (ROI). I.e. the percent return you make from your investment. There are assets and there are ASSETS! Renting out a house may give you 5 – 10% ROI; Investing in stocks may give you at least 20% ROI.
· For real returns money should go into investments with returns higher than the rate of inflation. Beware of liabilities that look like assets!
· To build your own home or to rent a house? Building a house that costs N3, 000,000 may save you an annual rent of N150, 000 (only 5% ROI) but tie down a whole N3, 000,000. Investing N3,000,000 may give you at least 20% ROI (ie. N600, 000) every year. This allows you to pay your rent of even N200, 000 while still having N400, 000 to reinvest, or pay other bills, or start building your home with.
Research has shown that no matter how many dips the stock market experiences over the years, its average performance over a period usually yields the highest returns over other forms of investments
The 7 Laws of Money
1. Money comes to those who save it
2. Money multiplies for those who invest it
3. Money stays with the person who entrusts it to wise people
4. Money is lost when invested in things with which you are not familiar with
5. Money is lost at a fast rate by pursuing get-rich-quick-schemes
6. Unclean money never pays
7. Money must not be an end in itself, but a means
Law # 1: Money comes to those who save it
· The key to saving is to consider yourself as another of your bills and expenses, and …PAY YOURSELF FIRST!
· Most people retire poor because their “Expenditure always rises to meet their income” (Parkinson’s Law)
· If you allow your expenses to increase at a slower rate than your income and you save or invest the difference, you will by God’s grace become financially independent in your working life
· Out of Sight, Out of Mind. Get the money out of quick reach before unnecessary liabilities come. Problems don’t leave cash-in-hand (or cash-in-bank) alone. Use adashe (cooperatives), asusu (piggy bank), and investment accounts, etc. to protect your money from your little manageable financial challenges.
· Resolve to save and invest at least 50% of any increase you receive in your income from any source (salary, allowances, bonuses, inheritance, gifts, etc.). Make do with (or enjoy!) the rest, and do this for the rest of your career life
· Delayed gratification is the key to financial success
Tips for Increasing Income
Money is an effect not a cause. The amount of money you earn is a measure of the value that others place on your contribution to what they are paying you for – the value of the work you do, how well you do it, and the difficulty of replacing you. If you wish to increase the effect, you have to increase the cause. One of the best investments of your time and money is to increase your earning ability. To be an expert – work to learn, not to earn! Top 20% of every profession are always in demand, never jobless. Work more than you are paid and you will eventually be paid more than you work. To achieve more than the average person, you must work longer, harder and smarter than the average person. Play the game well, and don’t keep looking at the score board – good scores are a by-product (or effect) of a good game.
Law # 2: Money multiplies for those who invest it
· Investing means acquiring assets – things that bring money into your pocket
· Fulani Family Financial Legacy: 1 chicken (+ 2/3 years) → 15 chickens = 1 goat (+ 4/5 years) → 5 goats = 1 calf/cow (+10/15 years) → cattle herd == Financial security (motorcycle, marriage, Hajj, etc.)
· Leave the growing capital investment alone. Do not “celebrate” or touch the growing “chickens” or “goats”! Hold up an egg, but see a herd of cattle. Hold a seed of something and see anything you want.
Example of compounding effect of approx. 20% profit on N100,000 over 4 years
Year 1: N100, 000 + 20% = N100, 000 + N20, 000 = N120, 000
Year 2: N120, 000 + 20% = N120, 000 + N24, 000 = N144, 000
Year 3: N144, 000 + 20% = N144, 000 + N28, 800 = N172, 800
Year 4: N172, 800 + 20% = N172, 800 + N34, 560 = N207, 360
v 20% every year for 4 years = DOUBLE initial amount every 4 years
A Waqf or Child’s N100, 000 investment after 36 years at 20% per annum
In 36 years, N100, 000 will double 9 times to become N51, 200,000. By the 37th year, it would have grown by an additional N10, 240,000 (20% ROI) in just one year!
Sabr – Self-restraint & Self-discipline
· Develop short-term solutions (through investments) to long-term challenges – children’s education, own home, retirement, medical bills, social service, endowment (waqf), extended family, orphaned relatives, etc.
· “Over-night success” takes at least 10 -15 years
· Self-discipline is doing the right thing at the right time whether you feel like it or not
· Sacrifice in the short term is the price you pay for security in the long term.
· Now! is the most important and strategic time for impacting on the future
Law # 3: Money stays with the person who entrusts it to wise people
Who else is investing in it? Who’s managing? Who is monitoring? Where do the managers of the funds invest their money? Consider past performance as best predictor of future performance (especially for a layperson)
Fear of Failure in Investments?
Nothing will ever be attempted if all possible objections must first be overcome. If for fear of failure you fail to try, you have failed automatically. Falling is not failure. Failure is not standing after you have fallen. “After every hardship is relief” – Identify the worthwhile relief and go through the necessary hardship with the belief that “after every hardship is relief”.
The Road Less Travelled
· “If you don’t change direction, you might end up where you are heading.”
· “Successful people are those who make a habit of doing the things that unsuccessful people don’t like to do”
“Satan threatens you with the prospect of poverty and bids you to indecency, whereas God promises you His forgiveness and bounty; and God in infinite, all-knowing” (Qur’an 2:268)
“Pray to God, and tie your camel!” (Hadith)
“Which of the favours of your Lord will you deny?”
Thank you and we wish you all the best in this life and the next.
Peace be you (wassalaamu alaikum)!
Filed under: TTC in Sudan
