As we enter the final quarter of 2024, many Nigerians are reflecting on a year filled with economic uncertainty. With prices going higher, exchange rates constantly fluctuating, and the cost of living increasing, navigating your finances has become more critical than ever. But don’t worry—you don’t have to be a financial expert to make smarter money decisions. You just need to understand some key financial terms and how they apply to your day-to-day life.
In this article, we’ll break down 7 essential financial terms every Nigerian should know before 2024 ends. These aren’t just buzzwords; they’re practical concepts that will help you make informed decisions as you tackle the country’s economic realities.
7 Financial Terms to Know
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Inflation
What It Means: Inflation happens when the cost of goods and services rises, and your money buys you less. It’s like filling a basket at the market only to find that your budget no longer covers what it did just a few months ago.
Scenario In View
Last year, a 25kg bag of rice cost around N35,000. Today, that same bag is going for over N50,000. This steep rise in prices is inflation at work, and it’s one of the biggest financial challenges Nigerians are facing right now.
Take Away: With inflation continuing to erode purchasing power, it’s more important than ever to find ways to protect your money. Whether through smart budgeting or investing in assets that outpace inflation, you need to stay ahead. Simply saving naira might not be enough anymore.
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Interest Rate
What It Means: Interest rates determine how much extra you’ll pay when you borrow money or how much you’ll earn when you save it. It’s essentially the price tag on loans and the reward for saving.
Scenario In View
Imagine you take out a N200,000 loan with a 20% interest rate. You’ll have to pay back N240,000. On the flip side, if you save N200,000 at a 5% interest rate, you’ll earn N10,000 by the end of the year.
Take Away: Interest rates in Nigeria have been fluctuating and understanding them will help you make better decisions whether you’re borrowing for school fees or saving for the future. High interest rates can be a burden when borrowing, but they can also be an advantage for savers and investors.
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Exchange Rate
What It Means: The exchange rate shows how much naira you need to get one unit of a foreign currency, like the dollar or euro. It affects everything from imports to tuition fees for studying abroad.
Scenario In View
If the exchange rate is N900 to $1, and you need $500 to pay for an online course, you’ll need N450,000. If the rate jumps to N1000, that same course will now cost you N500,000.
Take Away: The exchange rate impacts not only the price of imported goods but also travel, education, and even investments. Knowing how exchange rate shifts impact your spending helps you plan better, especially for any international transactions.
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Liquidity
What It Means: Liquidity refers to how easily you can convert your assets into cash without losing value. The quicker you can access your money, the more liquid it is.
Scenario In View
Let’s say you own a plot of land in Delta State. That land is valuable, but it could take weeks or months to sell it if you suddenly need cash. In contrast, money in your bank account is highly liquid because you can access it immediately.
Take Away: Emergencies don’t wait, and having liquid assets gives you the flexibility to deal with them. While it’s important to invest, make sure you also have enough cash readily available for life’s unexpected turns.
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Diversification
What It Means: Diversification is the practice of spreading your money across different investments to reduce risk. Think of it as not putting all your eggs in one basket.
Scenario In View
Imagine you’ve invested all your savings in one company’s stock. If that company hits hard times, your money could vanish. But if you spread your investments across multiple sectors—say, agriculture, real estate, and tech—you reduce the chances of losing it all.
Take Away: Given Nigeria’s volatile economy, diversification is crucial. By spreading your investments, you protect yourself from the unpredictability of the market and increase your chances of earning returns.
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Debt-to-Income Ratio
What It Means: Your debt-to-income (DTI) ratio measures how much of your monthly income goes toward paying off debt. The higher the ratio, the harder it becomes to manage additional loans or expenses.
Scenario In View
If you earn N300,000 per month but spend N150,000 on loan repayments, your DTI ratio is 50%. This means half of your income is tied up in debt, making it difficult to take on any more without financial strain.
Why It Matters: As borrowing becomes more common in Nigeria, keeping your DTI ratio in check is key to staying financially healthy. A high DTI can lead to financial stress, missed payments, and even a damaged credit score.
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Capital Gains
What It Means: Capital gains are the profits you make from selling an investment for more than you paid for it.
Scenario In View
If you buy a plot of land in Ibadan for N3 million and sell it three years later for N5 million, the N2 million profit is your capital gain. Similarly, if you invest in stocks and sell them at a higher price than you bought, that difference is your capital gain.
Take Away: With inflation and the high cost of living, finding ways to grow your wealth is essential. Understanding capital gains helps you recognize the potential benefits of long-term investments in real estate, stocks, and other assets.
In conclusion
As 2024 draws to a close, staying informed about key financial terms is crucial. Whether you’re saving, investing, or just trying to make ends meet, these terms will empower you to make better decisions. Understanding inflation, exchange rates, and the magic of interest rates can help you protect your hard-earned money and even grow it in these unpredictable times.
At Credit Direct, we’re committed to helping Nigerians thrive financially. From loan options to investment tips, we’re here to support you every step of the way. If you found this article helpful, don’t keep it to yourself—share it with your friends and family.
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