• Monday, May 27, 2024
businessday logo


Personal finance lessons from Nigeria as economy faces COVID-19

Spend on things that you really need

Nobody could have predicted the outbreak of the Coronavirus and its impact on global economies, but the very first rule of life is to expect the unexpected. It is the wisdom in “saving for the rainy day” but one Nigeria failed to heed.

Despite the brilliant response to the virus threat by Nigeria health officials, the government’s economic response has left much to be desired especially since the country’s economic defence system had been deteriorating before now.

These are some lessons the country can teach us in our own personal finance.

Diversify your income

The crisis Nigeria risks facing largely emanates from the shock to the price of oil, a commodity that accounts for around 90 percent of foreign exchange earnings for Nigeria and a significant portion of government earnings.

Oil fell to as low as $31 per barrel which put both the Central Bank of Nigeria and the Federal Government on the edge because all of Nigeria’s egg (or dollars) are in a basket – in this case, oil.

Relying on a mono-source of income is never a wise thing to do whether as a country, an organisation or an individual.

One could suffer significant damage to financial status should anything unexpected events affect the source of one’s income. It is much dire if there is no plan B to fall back on.

Prepare for the rainy days

It is either Nigeria is an optimistic country or a reckless one.

In 2016 the country suffered its first recession in a quarter-century because oil price crashed.

While one would have thought the country would have been better prepared for another oil downturn (because Nigeria cannot determine oil price), it drained its Excess Crude Account (ECA) down to around $70 million just before the oil market crashed again in 2020.

There is no need saying “God forbids it” because, after sunny days, the rainy ones follow.

You should endeavour to save and invest at least 20 percent of your monthly income to prevent unpleasant outcomes.

Use debt wisely

Debt is not bad, per se. It is one of many ways companies around the world raise money to do business, make money and expand.

Many of the world’s richest people are indebted too because, for people and corporations, debt is a relatively cheap capital.

This doesn’t mean you should go around borrowing because debt can also be a burden, especially if used for wrong and unproductive purposes.

Nigeria over the years has amassed debt which cost over 50 percent of the government’s revenue just to pay interest.

In the third quarter of 2019, Nigeria paid $263m as interest fee on its Eurobond, according to DMO. The dollar debt of around $10bn would spike (in naira terms) if the country devalues its currency should the CBN be unable to hold the fort.

For individuals, “Ideally, lenders prefer a debt-to-income ratio lower than 36 percent, with no more than 28 percent of that debt going towards servicing a mortgage or rent payment,” says Investopedia.

Hope for best, prepare for worst

Assuming that all will be well is not often a wise thing to do if you critical factors that affect your wealth are beyond you.

Nigeria in its 2020 budget, assumed a seemingly conservative oil price benchmark of $57 per dollar, but a budget deficit of around N2.4 trillion was met with puzzled faces of analysts and economists.

Their scepticism has turned out to be grounded on reality while attempts by the government to revise the budget in the light of new realities showed the lack of foresight and their over-optimism.

When preparing your budget or planning ensure you consider the worst-case scenario.

Ask the “what-ifs” and create a plan B should those events materialise.

Granted, it is not possible to tell how events would unfold, but preparing for those kinds of deviations can help reduce shock when they occur and unlike Nigeria which has been slow to react to the threats to the economy, you would be able to improvise almost immediately.