Personal Financial Planning – Earning Income (III)

Last week, we mentioned that our country is blessed with multitudes of ways to create value and wealth for different people in different socio-economic strata of our society. We also briefly mentioned what tends to be the issue that many of us face in identifying and seizing these opportunities. We will take this up in […]

Last week, we mentioned that our country is blessed with multitudes of ways to create value and wealth for different people in different socio-economic strata of our society. We also briefly mentioned what tends to be the issue that many of us face in identifying and seizing these opportunities. We will take this up in full later. For now, we will just take up the types of and sources of earning income.

We can broadly categorise income sources into passive income sources and active income sources. I am using the two adjectives on a relative basis and rather carefully. In the first instance, ALL income sources need active monitoring and management.

Passive income sources: These are income sources for which ‘reasonably’ little time is required in managing it. Typically, ‘reasonably’ much time might be invested in identifying such income sources and ultimately committing to it. However, once we commit to them, little time might be required of us to actively manage them. A good example of such income sources is investments in company shares. So, we can take as much time as might be required to study and understand the investment landscape, the opportunities therein, the specific companies we may be considering to invest in, how well they may be doing now and how well they may do in the future. We may also take some time to decide how much of the shares we will need to buy and how we may finance the investment. These are all details that might take time for us to sift through at the end of which we may end up investing say N5 million in UBA plc. shares.

But after we have made those decisions deliberately, intelligently and wisely, we just need to monitor how well the shares might be doing based on how well the company is doing in the operating economic environment. Obviously, we will need to keep abreast with developments, earning our dividends, gaining capital appreciation, seizing rights on new issues, and even selling a part or the whole of our investments, etc. Outside this, however, we do not get involved in managing the company we invested in as regards the core and detailed aspects of their operations. Even if we happen to be non-executive directors in such companies, we are still not required or expected to help in running it on a fulltime basis. We may just be limited to our board and board committee meetings. This is essentially what makes earning income from such sources ‘passive’.

Depending on our personal choices, we may also invest in other financial assets such as Sukuk, Treasury Bills, Commercial Papers, etc. Each of these assets would have income we can earn from them. Other passive sources of income might include investments in rental property, which earns us rental income on monthly, quarterly or annual basis as may be agreed.

Active income sources: As in decisions about passive income sources, we are required to invest reasonably much time in identifying active income sources and ultimately committing to it. As opposed to passive income sources, however, substantial time and effort is expected and required of us to be able to earn from active income sources.

Good examples of active income sources are our jobs as middle-level managers and senior executives in our places of employment. First, we gain requisite education and certifications, then we make a fundamental choice to be in the oil industry, banking sector or the public sector. Once we get employed, we are typically expected to report to work each working day of the week from 8am until close of business at 5pm or often thereafter. We go through this every week, month and year, for as long as we remain employed. In return for our services, we get paid salaries and all sorts of benefits. Another example of active income source is starting a business (or buying one) which we will run on our own, obviously with as many other employees as the business may require. In return for our intellectual, physical, emotional, financial investments, our business may be successful to pay us some allowances and dividend from the profits made, as well as capital gains in our business valuation.

Regardless of the income source or sources we may decide, there are few principles that we should be aware of:

Diligence: Earning legitimate income in line with our personal aspirations requires that we always do our homework very well. This includes deciding on what we are personally capable of and interested in doing as well as what will truly earn the expected income for us.

Be comfortable with delayed gratification: Building assets and earning income require that we have the capacity to delay gratifications. In essence, we have to make certain sacrifices ‘today’ for correspondingly gain larger benefits ‘tomorrow’.

Always be on the right side of the law: We have mentioned already that it is imperative that whatever we are striving to do to earn income be legitimate.

Be fair: Beyond being on the right side of the law in the course of whatever we are doing to earn income, we should always be fair in how we go about doing what we do and how we interact with others.

Start small: Everything we want to do to earn income, will require time, effort and other resources. We are likely to get certain things wrong initially before we build experience, skills, and wisdom. So, starting small in most of what we want to do makes a lot of common sense. From investment to running our business, it is wise to start reasonably small and scale up as we gain confidence.