Creating Multi-Generational Wealth with $2,500 in Nigeria

1. My Blueprint on Creating Multi-Generational Wealth with only N500,000 ($2,500)
Written By: Oluseyi Akindeinde
Over 93% of Nigerians are struggling in their financial lives (http://www.bbc.com/news/world-
africa-17015873) with over 70% living below the poverty line (http://dailyindependentnig.com/
2014/05/world-bank-report-poverty-nigeria/)
What you are about to read will most likely change your thinking about wealth and wealth creation
(http://www.investopedia.com/terms/w/wealth.asp). At least it changed mine when I discovered it.
So brace yourself up. It’s a long read but well worth it in my humble opinion. The subject of wealth
is something that isn’t often discussed in public - atleast not on the social media platforms. It’s like
some sort of taboo to discuss finances in these parts and I wonder why. I believe firmly that your
greatest wealth is what you know and your greatest risk is what you don't know.
If I wasn’t in the tech business I probably would be a full time investment banker / analyst because
my second passion is wealth building. Make no mistake about it, in Nigeria POVERTY IS VERY
REAL (http://www.vanguardngr.com/2014/04/440695/). Forget about the pockets of affluence that
seem abound - these are the exceptions rather than the norm.
It is estimated that Africa, with a population of approximately 1.1 billion can only boast of 140,000
people with a net worth of $1 Million dollars (One Million Dollars) and above - thats
approximately 0.012% of the African populace
(https://en.wikipedia.org/wiki/Millionaire#Number_of_millionaires_in_the_world) with Nigeria only
having 15,900 dollar denominated millionaires with an estimated population of 160 Million
(0.01% of the population) http://www.howwemadeitinafrica.com/which-african-countries-have-
the-most-millionaires/29318/ In essence, less that 16,000 Nigerians have a net worth of N200
Million and above. There are only 13 dollar denominated billionaires in Africa with only 5
legitimate billionaires in Nigeria
https://en.wikipedia.org/wiki/List_of_countries_by_the_number_of_US_dollar_billionaires#Africa
There were only 83,000 African Millionaires in the entire world in 2005. This means that over the
course of ten years, we have not even managed to double that number in Africa. I think its to do
with our mentality in these parts. The problem stems from the fact that very few of our so-called
“rich” men in Africa ever share true wealth building strategies - preferring instead to glamorise it
and make it seem unattainable.
Well, if your name is currently not on the list of the 15,900 Nigerian millionaires then read on,
otherwise still read on. I will explain in detail how you can have your name on that list by the time
the next one is out say in 2025.
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2. What I am about to outline is probably the easiest approach to generational wealth creation there
is. It is a clear road map and age defying principle that can work for anyone including you. It
doesn't matter who you are. By the time you are done reading this, you will be half way towards
creating sustainable wealth and the best part is that you can apply this strategy to anything you are
doing right now. It doesn't matter how much you have, you can create wealth using this time tested
principle which if followed diligently will allow you lead a life of abundance.
(http://www.punchng.com/business/am-business/developing-an-abundance-mindset-2/).
I also FULLY recognise that this also may not be for everyone and everybody.
For the purposes of this piece, I define wealth as the act of acquiring valuable assets to increase
one’s affluence and resource control that guarantee prosperity. You are wealthy when you have
money, possession and valuable assets, much more than you can possibly spend in your life time -
it is a state of being financially well-off (http://www.cnbc.com/id/101837456).
Firstly, let me start by telling you why a lot of people are not wealthy or even creating wealth.
If you interviewed a thousand people and asked them if they want to be rich, I bet 100% would
answer in the affirmative. However, a lot of these people are neck deep in trouble financially,
constantly living on nothing other than their wits. Inability to build lasting wealth has been
attributed somewhat to the “scarcity of foresight” - a concept which prevents people from seeing
what’s really important, engrossing only in the present needs. Apparently, it seems we have also
been brainwashed by the mass media (both local and foreign) into thinking that only when we
SPEND an awful amount of money do we truly become happy and fulfilled. We have been
bombarded by the media with the notion of CONSPICUOUS CONSUMPTION
(http://www.punchng.com/business/am-business/what-is-conspicuous-consumption/) - that our
lives only make sense when we outspend ourselves turning us into standard bearers of
consumerism.
It’s all a BIG scam.
A typical example is what obtains in the entertainment sector. It’s little wonder you are continuously
regaled with news of one celebrity picking up one big ticket item or the other every time you open
up any of your social media platforms. It’s quite astounding to be honest - like a popularity contest
in the display of materialism, constantly trying to outdo each other completely unencumbered by
reality (http://saharareporters.com/2013/09/19/nigeria-haven-ostentatious-and-wasteful-
ikechukwu-mbachu). Admittedly these celebrity nouveau riche make a lot of liquid cash and a
number of the purchases are well within their means - even if I think some items flashed online (of
very little material value) have a toxic combination of the outstanding, the outlandish and the
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3. downright outrageous. I am amused by the usual suspects in the non-pensionable industry who
portray a life more hyped than one less lived not only because of the naivety displayed but because
they are inherently selling themselves short. Obviously they haven’t learnt any lessons from stars of
the bygone era who have since withered on the vine. In a rather unfortunate state of affairs, the
otherwise teeming millions of fans ‘following’ them on Twitter, Facebook and Instagram become
aspirational with so many of them living on a knife edge as a result of the dissonance between their
situation and the opulence flaunted daily in their faces. A trend apparently borne out of western
culture assimilation with a lot of unnecessary emphasis on purely the external drivers of worth.
Instead of actually accomplishing things, they often settle for the appearance of accomplishment.
To me, it is a masterpiece of financially delusional thinking.
Whilst I’m not privy to the financial standings of these celebrities, I’m going to use one for my
article illustration. Take a Wizkid for instance (and it could be any one of them celebrities). He is
probably around 25. He’s on top of his game right now (he’s been for a few years) with regular local
performances, more than a couple of multi-national company endorsements and a number of
awards to boot. I make it that his endorsement package alone would run into the N30 - 40 Million
range per annum if not more. Then there are the side gigs, the shows - he is reported to average
about N4-N5 Million per show (http://www.vanguardngr.com/2014/05/top-music-stars-earn-per-
show/) - the private appearances, not to talk of the album sales and international music tours. He is
reportedly worth over $11 Million according to http://constative.com/celebrity/top-20-richest-
musicians-in-nigeria-and-their-net-worth-2. Whilst I don’t trust that figure (I don’t know how the
figure was arrived at), I still make it that he turns over N80-100 Million conservatively per annum
even if he reportedly made N430 Million in 2014 according to http://www.nairaland.com/2091423/
top-10-highest-paid-entertainers.
Lets suppose that this year he deposits N10 Million (just 10% of the estimated N100 Million
annual income) in a fixed income instrument with a 12% yield per annum (more on this in a
moment). By the age of 50 (Ali Baba’s age), that ordinary N10M that he supposedly left there
(without touching) will be…wait for it…N170,000,000 (One Hundred and Seventy-Million Naira).
That means, even if he never saves or invests an extra kobo again in his entire life and ‘burns’
through his subsequent annual earnings, he would wake up in 25 years time (all things being equal)
and be N170 Million Naira richer. I don’t really know too many working 50 year olds in Nigeria
today with N30 Million in free cash never mind N170 Million.
How is that possible you may ask? It’s a lot easier than you might think and it doesn’t involve any
complex financial jargon. No creativity is even need. No stock market timing. No trend analysis.
Nothing. It is a simple financial leverage that very few take advantage of. It’s simply the power of
COMPOUND INTEREST - earning interest on your interest (http://einvestingforbeginners.com/
2014/04/23/compounding-interest/). The only critical variable needed to be stupendously wealthy
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4. is TIME - something we all share in common and are freely given. I say time is ‘critical’ because
whilst it is free, a lot of people don’t just have it.
Compound interest can create multi-millionaires from average people. I think it should actually be
called “exponential” interest as you’ll see later.
Just a quick word before I continue.
Please, please and please, if all you have about shares, stocks, mutual funds and the intricacies of
variable rate instruments is a vague idea, don’t be pushed into buying them. You may never make
money. You may even lose all. Paradoxically, the best return till date (YTD average of 25%) is still
obtainable on the NSE All Share Index (http://nairametrics.com/nse-all-share-indices-returns-beats-
bonds-and-other-fixed-income-investments/), however, you need to dedicate time to it - a lot of it.
The thing about trading the stock market is this:
Let’s suppose you buy a stock of a blue chip company for N100, say a million Naira's worth, that is
10,000 shares. If it goes up by 50% in one year it’s now worth N1.5 Million right? That’s good, solid
returns. But what if it goes down by 50% in one year. It becomes N500,000. Therein lies the
problem with a negative yield - as for it to even get back to your original value of N1 Million, you’ll
need it to double in price (that is increase by 100%). Trouble in paradise - it just may never double
in price from then on. Better still, it may take another 10 years or more for it to double in price and
that is to just get it back to your price of initial purchase not to mention all the expense ratios -
realise that it’s a lot easier for market forces to drive down stock prices than to drive it up (http://
www.punchng.com/business/am-business/why-the-nigerian-stock-market-is-falling/).
I know I’m being overly simplistic but the point is, unless you are sure you can continuously pick
winning stocks (which is by no means trivial), DON’T invest in them. Stock market operators, who
only advertise market gains and never losses, make money from transaction volumes, so it’s in their
interest to recommend and sell shares to you. It’s of little concern to them whether or not you
make any money in the process.
An old stock market investment rule that holds true says it’s not about timing the market’s ups and
downs, but about the time you spend investing in the market. I have no idea where the stock
market is heading tomorrow, next month, or next year – and anyone who proclaims to know is
lying.
If not stocks then what? Some will say real estate (aka fixed, tangible assets). That’s all good but it is
highly capital intensive and it doesn’t pay an interest or a dividend (unless it’s a rental property).
You only make money on the capital appreciation (which is subjective and also depends largely on
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5. the location). It is also a highly leveraged asset class. What I think a lot more people should do is
put their money in Fixed Income Securities or Money Market Instruments such as the Nigerian
Treasury Bills (NTB) or long term fixed rate government bonds. The key is the guaranteed ‘FIXED’
rate as well as the tenure. It is a fully liquid investment class often issued with maturity tenures of
91 days, 182 days and 364 days ((http://www.nairaland.com/878880/treasury-bills-nigeria).
NTB is currently the safest form of investment in Nigeria if your focus is on risk-adjusted return-on-
equity. It is basically a zero-risk, tax free, short-term debt obligation fully backed and guaranteed by
the credit of the Federal Government. It’s sort of like an IOU they make out to you and in return you
are paid a premium in the form of a yield. You could also invest in FGN (sovereign) bonds (http://
www.punchng.com/business/am-business/how-to-invest-in-fgn-bonds/) but that’s not the focus of
this piece.
How then do you take advantage of the NTB market? It really is quite easy.
As I’ve enunciated (in the case of Wizkid) above, take the yield (or interest rate) on the last auction
for the 364 day bills which was 13.00 levels or 13% (http://www.nairaland.com/878880/treasury-
bills-nigeria/106#35145875). Lets assume he keys into this position with his N10 Million and it is
COMPOUNDED annually for a period of 25 years (http://www.thecalculatorsite.com/finance/
calculators/compoundinterestcalculator.php), he’ll have N212 Million (Two Hundred and Twelve
Million Naira) by the time he is 50 (as opposed to 170 Million at 12%). Mind boggling isn’t it? A
marginal +1% increase yielded N42 Million (Forty-Two Million Naira) over 25 years on a N10
Million Naira principal.
What if he hypothetically doubles his principal to N20 Million at 13% over the same 25 years, he
would have N424 Million (Four Hundred and Twenty-Four Million Naira) by the time he turns
50. Leave it for an extra five years and we are looking at N782,317,959.15 Million (Over Seven
Hundred and Eighty Million Naira) He could retire at 55 and travel the world. He wouldn’t have
to work for money again if he so chooses. Even at that age of 55 he could decide to live basically
off the interest on that amount. If he terminates his investment but continues to earn the 13% (and
have only the interest deposited in his account), he’ll earn almost 102 Million Naira a year or
about N8.5 Million a month till he dies without having to touch the N780 Million accumulated
sum. And he’ll only be 55. Imagine someone like RMD earning this now just for waking up and
playing golf all day long. Salary for life if ever there was one.
All this would be possible because he delayed gratification - sacrificing ONE G-Wagon today to
secure his financial future. The best part is he really doesn’t have to do anything like monitor stock
quotes or mutual fund bid and ask rates or property index prices. Nothing. Plain old fire and forget.
It’s like clock work. It doesn’t care if you are tall or short, black or white, man or woman. It’s boring
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6. but it’s mightily effective. (Remember he doesn’t have to save another penny of his working or
singing life after this initial one time investment of N10 or 20M). Glorious Freedom.
Now, by comparison, the 1 year US treasury notes pay 0.28% interest rate http://
www.barchart.com/economy/treasuries.php. That is less that a third of 1%. So you can see that
Nigeria is pretty much an attractive economy to invest your hard earned money in if you are a little
disciplined. You don’t even have to be smart. Ghana’s rates are high though - paying 22.5% interest
rate on the 1 year tenured note and over 25% for the 91 day tenured note
(http://www.bog.gov.gh/index.php?option=com_wrapper&view=wrapper&Itemid=86). But you
have to be living there to take advantage of it. And just so that you know that the yields are actually
real, the rates for NTB between January and March 2002 were 20 - 22% (http://www.cenbank.org/
rates/GovtSecuritiesDrillDown.asp?beginrec=1991&endrec=2000&market=NTBP).
However, since we are not Wizkid (and celebrities alike) and we don’t all have a spare N10 or N20
Million Naira sitting in one bank account (of course some do), I’m going to consider two sets of my
friends demography to show how compounding and time can work for you and help in achieving
financial freedom and even create wealth. I will also be making a few basic but realistic assumptions
in the process. I will consider people between the ages of say 25-35 (Group A) and 35-45 (Group
B). For good measure I will add a free form third group (Group C).
A quick disclaimer is in order before I start. NEVER invest any amount of money that you can’t
afford to lose. And in order to fully take advantage of compounding, NEVER touch the interest
earned, always leave roll-over instructions. Now let’s start with Group A
Group A (Ages 25-35)
Here, time is still your friend (http://www.investopedia.com/university/beginner/beginner2.asp). I
will assume that in this group you have worked really hard (you probably have a total annual
income of N3-N5 Million Naira a year) and have managed to stack up free cash of N2.5 Million
by the age 25-35 which is not impossible. All you need to do is give up some money draining
habits or use an upfront payment that you may have been given in your company. Do you really
have to buy that expensive phone or dine at that fancy restaurant? Having N2.5 Million by age 35 is
definitely doable. If you stick this in treasury bills and leave it for 25 years earning 12% p/a, by the
time you are 50-60 you will have N42 Million Naira cash (Forty-Two million Naira) - attained
with just N2.5 Million and without having to save or invest another kobo in your entire working
life.
If you are able to negotiate a 13% interest rate (which is possible), you’ll wake up in 25 years time
to N53 Million Naira (Fifty-Three Million Naira) - a difference of N11 Million brought about by
just a marginal +1% adjustment in interest rate (1% is HUGE in the world of investing). By then you
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7. would be able to fund your children’s university education in any school and still have a little trust
fund left. Remember all you set aside was N2.5 Million. In fact if you leave that money for an extra
5 years at 13% you’ll have close to N98 Million (Ninety-Eight Million Naira). That is the power of
compound interest. Albert Einstein calls it the 8th wonder of the world and the most powerful
force in the universe (http://www.quotesonfinance.com/quote/79/Albert-Einstein-Compound-
interest).
Now imagine you work so hard that you manage to save N5 Million Naira free cash by the age of
35 (i.e you double your initial principal), you would have amassed N106 Million Naira (One
hundred and Six Million Naira) by the age of 60. And this would happen even if you never get a
raise in salary or level promotion throughout your working career. The true definition of earning
while you sleep - making your money work for you - and money does work pretty hard when
utilised properly.
In Summary (Group A):
N2.5 Million at 13% for 25 years yields N53 Million
N2.5 Million at 13% for 30 years yields N98 Million
N5.0 Million at 13% for 25 years yields N106 Million
N5.0 Million at 13% for 30 years yields N195 Million
Group B (Ages 35-45)
In this group, time is not exactly your best friend but it’s still possible to retire wealthy. Only this
time I make it that you’ll need an initial principal of say N7.5 Million Naira. I reckon that by this
age some people would have had between 11 to 20 years of work experience (with a salary of N9-
N15 Million a year) so N7.5M isn’t too difficult to have saved up over that time. It’s just the cost of
a brand new Honda Accord. So give that up and stick it into NTB. I’ll make the tenure of investment
maturity 20 years at the initial 12% yield. By the time you are 55-65 years old, you would have
amassed N72 Million (Seventy-Two Million Naira), a substantial amount knowing fully well that
even at 65, you’ll probably live till 90 or 95 which would still be a further 25-30 years away. If you
manage to earn an additional +1% interest yield making it 13% (again this is possible) you will
wake up to N86 Million Naira (Eighty-Six Million Naira) by age 55-65. The power of
compounding right at play there again. It doesn’t care about New Year or Independence day or
Public holiday. It just works day in, day out.
Imagine again that you work very hard and instead of buying that Prado jeep for N15 Million
Naira you decide to stick it in your NTB account for 20 years at 13%. You will wake up in 2035 to
N172 Million Naira (One hundred and Seventy-Two Million Naira). And just for good measure
if you leave it for an additional 5 years, you’ll have N318 Million (Three Hundred and Eighteen
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8. Million Naira) for your children’s trust fund. All because you decided to get a cheaper ‘tokunboh’
car instead of buying a Prado jeep that would have since depreciated in value and sold off. Ask
yourselves this? Even as it is now, how many 55-65 year olds do you know with N30 Million free
cash in their bank accounts. I bet not many. Think about what N172 Million could do for you in
retirement.
In Summary (Group B):
N7.5 Million at 13% for 20 years yields N86 Million
N7.5 Million at 13% for 25 years yields N159 Million
N15 Million at 13% for 20 years yields N172 Million
N15 Million at 13% for 25 years yields N318 Million
I don’t care who you are or what you do, these numbers are staggering especially considering what
you’ll have to give up to get there. It’s a little sacrifice if I’m honest.
Group C (Free Form)
It’s always better to start investing early, preferably in your mid 20s. So if by the age of 25, all you
could afford to save up is just N500,000 perhaps you already have 2 -3 years of work experience,
this might be the only thing you would need to set aside to secure your financial future. If you put
that in NTB at 13% and forget it for the next 35 years, by the time you clock 60 you would have
N36 Million (Thirty-Six Million). Trust me, that 500k will not even make a blind bit of dent in your
life. Let me now make it better, if you are able to consistently add N10,000 monthly (via a direct
debit instruction) to your portfolio of 500k for the 35 year period (which is just 120k p/a), by the
time you clock 60, your account will be worth over 106 Million Naira (One Hundred and Six
Million Naira). There’s actually a name for this strategy - it’s called (Naira) cost averaging.
The truth is even if you are 35 years old now and all you can afford is N1 Million (One Million
Naira). Put it in NTB yielding 13% for the next 30 years. By the grand age of 65 you would have
exactly N39,115,897. Yes, almost N40 Million. If you leave it for an additional 5 years (till you are
70 years old), you would have over N72 Million. If however you are able to set aside an additional
N20,000 monthly, (that is cost averaging at 240k p/a) into the account consistently for the 30
years, by the age of 65 you would have stacked up N114.3 Million. Call it your insurance money
or pension or any name you give to it - it is financial freedom. It is peace of mind and it really
doesn’t take anything to achieve it. After all Buhari is 72 years old, fit, strong and still the president
of Nigeria. Even the billionaire Warren Buffet is almost 85 and he’s still actively working. There is a
lot of life left after 65 and every single kobo counts in retirement.
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9. One of the easiest ways to know when your principal will double with compound interest is to
divide whatever your interest rate is by 72. That is N1 Million Naira at 12% will double to N2 Million
in 6 years (72/12) which would in turn become N4 M another 6 years later… and it continues like
that for as long as you want it basically doubling every 6 years. That’s geometric effect of
compounding.
A lot of people think Bill Gates total net worth is derived from his stake in the company he founded
- Microsoft. In fact Microsoft constitutes only one-fifth (20%) of his net worth
(http://www.forbes.com/sites/victoriabarret/2012/09/19/where-americas-richest-man-is-investing-
his-money/) the rest is tied up in a holding company he setup in 1994 to manage his entire
portfolio of investments. Run a google search on “Cascade Investment” or check here
https://en.wikipedia.org/wiki/Cascade_Investment. He’s got over 25 investment vehicles. Even
companies like Apple and Microsoft put a substantial percentage of their free cash flow in the
United States Treasury notes and other fixed income and variable rate instruments as shown here
http://www.quora.com/Where-do-large-companies-like-Microsoft-and-Apple-keep-their-cash
(Check the entry by Garrick Saito)
Talking about multi-generational wealth, let me now discuss the way to go about building that
fortune with just N500,000.
If you stick the 500k amount into an account with 13% over 100 years (by the time your child’s first
child’s child is about the age of 25) that N500k will be…wait for it…over N101.5 Billion Naira in
liquid cash. You would have built a monumental foundation for your yet unborn generation - and
that is with just N500 Thousand Naira today. Chump change.
The question is: “Is this REALLY possible?” The the answer: “A resounding YES”. It is not just
possible, it is relatively straightforward and achievable.
Let me give you a little background.
I started investing about 10 years ago and bought my first mutual fund (Discovery with ARM) in
2005. I also bought the Aggressive Growth Fund, but just like I wrote above, it immediately lost
over 50% of its value. I bought the AGF at N20 per unit when it launched. A few years later during
the financial melt down it was trading at N9 per unit. Fast forward to 2015 it is trading at sub N14
per unit - making a loss of N6 per unit after more that 7 years
(http://www.arminvestmentcenter.com/umbraco/ARMDirect/PdfSurface/GetFundPriceHistory/?
fundKey=9&dateFrom=&dateTo=). Very well that the Discovery Fund compensated for it because I
bought that one at N161 per unit and sold 9 years later for N301 per unit
(http://www.arminvestmentcenter.com/umbraco/ARMDirect/PdfSurface/GetFundPriceHistory/?
fundKey=1&dateFrom=&dateTo=).
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10. Around the same period (2005), a friend (who’s left the country now) executed a small supply
contract for a manufacturing company in Ikeja. He made a net profit of 6 Million Naira. He
subsequently deposited 4.5 Million Naira of the profit in a fixed deposit roll-over mortgage
account earning 10% compounded quarterly (i.e 10.38% yearly) and then bought a small car with
the left-over balance of 1.5 Million Naira (car he’s since sold off for 550k before leaving the
country). The account presently has a balance of over N12 Million - and this is not treasury bills,
just the good old fashioned, interest bearing fixed deposit account with quarterly roll-over
instructions (monthly or quarterly compounding are better than annual compounding).
Whilst my mutual funds didn’t make anything in those years, in fact combined (Discovery + AGF), it
made a slight loss of 5%, my friend’s FD more than doubled (almost trebled) in that same period. I
know this because I recently introduced him to treasury bills and he’s about to invest N10 Million
(of his 12 Million) in NTB (for a higher yield of 13%) leaving N2 Million in the FD account just to
hedge his bet (http://www.punchng.com/business/am-business/treasury-bills-or-fixed-deposit-
which-is-better/). If he had bought a depreciating asset like a brand new car with that amount, that
car would probably not be worth much today (http://www.punchng.com/business/am-business/
are-brand-new-cars-worth-it/). Even as it is now, if he decides to leave the funds in the FD account
for another 20 years, that original N4.5 Million will be worth well over N87 Million (He would be
57 then) Almost 20 times his initial investment. Imagine that. No fuss. No story. He’s not in the
country at the moment but his money is working extremely hard for him.
I learnt in my years of studying engineering in school that positioning is what distinguishes signal
from noise.
After my experience with mutual funds together with my friend’s experience, I counted my losses,
sold off my Mutual funds (good thing it was open ended meaning you could sell it back to the
investment company at the prevailing bid price), shored up my capital and opened an NTB account
with an investment company, Kakawa Discount House a few years ago
(http://kakawa.com/ourservices/personal_wealth_mgt/products_and_services/index.php?
sphrase_id=1057). To be honest, this has been one of the best decisions of my life. Kakawa is
probably one of the most professionally run investment banks in Nigeria (I don’t work there) and I
currently enjoy a yield of 13% (http://kakawa.com/ourservices/personal_wealth_mgt/
products_and_services/tbbi/). They are very transparent in their dealings and their software even
makes it easy for you to compound your returns. I negotiate right down to every single percentage
point with my investment banker because I know the spiral effects over a long period of time. They
even have an account for people who are 40 years old and above and it comes with a fixed interest
rate of 13% (http://kakawa.com/ourservices/personal_wealth_mgt/products_and_services/kera/)
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11. I save and invest relentlessly. I probably invest over 75% of my income (95% of investments in fixed
income and a small 5% in combined equities and alternative assets). And I do this regularly. I have
never bought a brand new car. As a matter of fact, I struggle to buy any car above N3.5 Million
even though I love cars. Somehow, I manage to get good deals on first grade ‘toks’. When I go on
holiday I get to rent and drive the best sports cars anyway. I have also never travelled in business
class or premium economy. The cost/benefit ratio for me isn’t worth the price. And no, I’m not
cheap. I indulge myself from time to time only because I know I can fund it with my interest
income. I hardly buy things that can’t be paid for with interest income. I learnt after studying so
many wealthy people and investment gurus the cardinal rule of NEVER funding your lifestyle with
capital (principal) only interest or dividend income.
Now, here’s an illustration of how I have personally leveraged compound interest (and NTB) in
structuring a financial position for my daughter’s trust fund.
I took a portion of my December bonus at work to setup two logically separate trust funds for her.
In the first, I put in N1 Million - this will go towards her education. It’s sort of like a long term loan
made to myself which would be fully paid back (to myself) when she is 25. I would recoup all the
money I would have paid for her schooling and education by the time she turns 25 because by
then, the N1 Million would be worth in excess of N21.2 Million. That would, in essence be my
investment in her education recouped and paid in full with just N1 Million in today’s value. I make
it that over the course of her schooling, it would cost me no more than N20 Million which
averages about a million Naira a year over the period.
In the second trust fund account, I deposited N2.5 Million. Again by the time she’s 25, that trust
account would be worth over N53 Million. This account would be signed off and bequeathed to
her on her 25th birthday (all things being equal). She can then start enjoying the compounding as
well and if she also decides to leave it till she’s 50, she would have exactly N1,126,839,812.90. That
is over N1.1 Billion. She would be a billionaire (and dollar denominated millionaire) by the time
she’s 50 and she wouldn’t have had to work for it (I would be 87 then). And all this would have
been accomplished with just N2.5 Million today. So instead of buying that car I’ve been eyeing for
N3.5 Million, I have simply set aside my immediate want today to secure her financial freedom
tomorrow. A small price to pay. A little sacrifice for her. And remember I don’t have to save or invest
any kobo again (not that I would though).
Bottom line is that it is within the reach of anybody. You only need TWO things. TIME (which is free
to all) and DISCIPLINE. Never buy into the media hype about conspicuous consumption and
whatever else they are trying to push at you. It’s a deliberate point strategy to get you to spend,
spend and spend some more on items with limited value. It's all in knowing the difference between
what you want today and what you need tomorrow. You need to put your emotions in check when
it comes to spending. The key is the ability to delay gratification.
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12. Here’s my little submission.
Even if you are 40 now (with a 5 year old kid) and you are about to buy yourself that brand new car
to celebrate your 40th birthday. Please hold-on. A very good, standard brand new car these days
costs in the region of N6-N8 Million, let’s average that and say N7 Million. If you open up an NTB
account and you negotiate a 13% IR, by the time that child is 30 years old, it would be worth
almost N149 Million (One Hundred and Forty-Nine Million). It is well worth it. By extension, if
you are 25 years old now and you think you need a huge sum to be rich (http://
www.proshareng.com/news/23734), no you don’t (http://www.punchng.com/business/am-
business/how-to-invest-in-money-market-with-low-funds-3/). If all you can save up today is
N250,000 (some spend this on one item like a phone or tablet), by the time you are 60 at 12%
compounded quarterly (the rate is smaller because of the principal amount), you’ll have over N13
Million Naira and if you leave till you are 65, the account would be worth over N23 Million - This
with just 250k. Think about it.
I’m not saying you should live a frugal life to the point of being stingy and deny yourself of life’s
little luxuries (after-all immediately after that initial lump sum investment, you can pretty much
spend your subsequent incomes in your working career as you like) neither am I saying you should
use any particular company for your investment (again, I don’t work for any of them). There are a
lot of other investment companies dealing in fixed income instruments and NTB, even your local
bank - but banks may not offer you roll-over facility on treasury bills (http://www.punchng.com/
business/am-business/guide-to-investing-in-treasury-bills/). This is just what has worked (and
continues to work) for me.
Even if you were to consider inflation, at the current rate of 8-9%, I reckon it’s still ok. In any case I
would rather have a substantial sum in retirement than not have it as long as the yield exceeds
annual inflation figures. You will most likely regret the things you didn’t do far more than you will
regret the mistakes you made in retirement.
The downside to compound interest is that it can also work against you if you go to the bank for
overdraft facilities (i.e obtain loans). It’s for the same reason people are perpetually struggling to
pay off the interest on their facility. Worse still for debtors is that the lending rate in deposit money
banks these days is north of 23%. Therefore, if you borrow a modest N5 Million from your bank at
23% for 5 years (compounded quarterly) - guess what you’ll have to pay back - N15.2 Million
Naira. The interest alone is more than double the initial principal. If you extend the loan to 10
years, you’ll have to pay back N46.7 Million. Yes, that’s over 9 times what you initially borrowed in
just 10 years. It’s always difficult for debtors to pay back, so much so that banks have a special well
staffed department just to get debtors to service their loans or have them foreclose on their
collateral. That’s also the reason why the banks declare HUGE profits.
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13. This concept ought to be taught to pupils and students in primary and secondary schools
respectively. No wonder Albert Einstein said “Compound interest is the eighth wonder of the world.
He who understands it, earns it, he who doesn’t pays it.”
This then brings me back to Wizkid (and the celebrities) and by extension to all of us. Think about it
like this. If he sets aside N50 Million of his income now that he’s 25, which I know he can afford -
after all a female blogger bought a Range Rover half that sum last year
(http://www.nairaland.com/1905289/linda-ikeji-acquires-24million-naira). By the time he’s 50, guess
what he would have in his account. Just guess. He would have exactly N1,061,527,113.59 in cold
hard cash. Yes, you read that well. That is over a billion Naira (about $5 Million). If he leaves it till
he is 65 he would have accumulated over N6.6 Billion (about $33 Million). But at the rate these
guys are burning and bleeding cash, they may not even have that extra N61.5 Million topping by
the time they are 50.
Life by the inch is a cinch. Life by the yard is hard.
Think about this again for a moment. If your great great great great great grand father had
invested just 10 kobo (N0.10) about 300 years ago (in 1715) at 12% compounded annually. It
would be worth a staggering N58,264,872,583,508.22 (Over Fifty Eight Trillion Naira) today
roughly equivalent to $290 Billion (and that’s not Zimbabwean dollars). By now you will be the
richest man/woman on the planet (and by some distance too). Make of that what you will.
Your future generation can be given a leg up in life - and it starts with YOU.
An african proverb says “An old man who wakes up early in the morning to go to work, was once a
young man who slept a lot”.
I rest my case.
Disclaimer: Interest rates on fixed income instruments and NTB may vary. Consult with your bank or investment company
for details
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