This year has been tough financially, you have barely survived the rat race, you feel scarred and scared. Guys at your company were retrenched and you feel vulnerable too. Your savings are at an all-time low and your expenses are just escalating. You do not know how the new year will turn out financially and you are hoping for a miracle.
If this speaks to your situation, then here are eleven things, which if you do diligently, although they will not turn your situation around immediately, they will lay a superb foundation for you to master your money so that you can avoid this situation occurring again and again in the future.
The most important step is to start doing them now, don’t put them in any new year’s resolution, just start executing them one by one.
I have come to totally believe that in financial management, budgeting is what exercise is in physical wellness. You can not succeed financially without executing a budget.
As basic and important as it is, less than ten percent of people budget.
I am one of those who went for years without a budget. I spent any money that I had available in my account and stopped spending only when I was completely broke and I could not qualify to borrow from anywhere else. I was reckless and I realized this was a terrible way to run my personal finances. I needed a detailed budget to get a handle on where my money was going and start deciding where I wanted it to go instead of just watching it go away to wherever it pleased!
In a budget, income plays a colossal role unmatched by anything else. It dictates how big or long your budget will be. In any case, the bigger the income, the more you can do financially. Budgeting is a process that utilizes your mind; it is not just an exercise of writing down your income and expenses on a list. It’s a delicate balancing act that borders art. As you list your incomes, you are asking yourself questions such as, how do I increase the size of my revenues, how do I get a second income stream, how do I maximize on my time to produce more income or how do I just sleep and money continues to pour into my account?
If the income side of your budget has only one line, that is your salary, then you are running an unfathomable risk, you are already dependent because any threat to remove that income will lead to you kneeling and begging for forgiveness, even if you have not done anything wrong. Consider a second stream of income from passive investments such as shares, bonds and you can also start a second and third business.
Expenses are always a pain somewhere. They dictate the quality of your life. Expenses will adjust to diminishing any increase in income and if unmanaged will always balloon to be more than incomes.
A simple formula for managing expenses requires that you break your income into two halves, the first half to go to recurrent expenses and the other half to long-term expenses. Recurrent expenses are the daily must be met expenses which include taxes, living expenses such as rent, food and clothing, and loan repayments while long-term expenses go to your spirituality, pension, savings, emergencies, investments, down payments for large purchases and large debt clear downs.
This 50:50 rule may look daunting at first, but it is possible to juggle between each half and ensure that items are managed in that half. For example, in the recurrent half, by managing rent and food expenses, we can increase our loan repayments and likewise, in the long-term, we can redirect savings to a down payment or a huge emergency payout.
Having a vision of where you want your finances to be at retirement, using a budget tactfully as a tool to direct your energies on a day to day basis and remaining persistently consistent, you guarantee your journey to financial independence.
- Separate Needs from Wants.
My kids say that we need a new car. That our car is old and embarrassing. The car is able to get us from one point to another and sometimes even further. Sometimes it requires a lot of money for maintenance. Do I really need a new one?
The concept of need and wants is as old as human mankind. Separating needs from wants is a key personal finance skill that if properly utilized can propel you to living a life of joy and satisfaction. Invariably, all financial woes are because of the confusion between needs and wants.
By our very nature, we want newer and bigger better stuff, and companies are always churning out new stuff to entice you to upgrade to the S10 after the S9. They put in a lot of advertising to encourage your purchase and you will without notice fall and go for newer and bigger.
The question to ask is, what if I don’t buy this thing, what will happen? If your answer is nothing will happen, then that thing is a want. A need is required for survival, including stuff like food etc. The best way to make spending decisions is to distinguish needs from wants and develop the discipline of financing them in the right way.
Start by ensuring that each time you want to buy anything, you have thought through why you need it and you have also debated within yourself, the consequences of not having it. Then decide whether it’s a need or a want. If it is a need, finance it with whatever means possible including borrowing. However, if it is a want, ensure to finance at least 50% from your savings.
Saving refers to the act of deferring consumption. You can save money, water, electricity, food and virtually anything you spend on.
You save to meet emergencies such illnesses, accidents, funerals, life goals e.g. building a career, business or owning a home and get out of debt while funding your retirement.
First step to saving is having a plan, and tactics include; planning your meals to save on groceries, use of cash instead of cards, having hospital insurance instead of paying for medicals direct, creating automatic deductions for your savings, avoiding impulse spending, having a shopping list for yourself and those who accompany you shopping, negotiating each time you purchase high-value stuff, bargain hunting for non-emergency purchases and (Do IT Yourself) DIY are techniques.
Join savings groups, chamas, and saccos to maximize your savings.
Saving should be equal or more than six months gross pay. This number is not arbitrary; it is based on the average time it takes to create a new income stream.
Saving is the first step to financial independence and it is the only personal financial management tool that builds your confidence and resilience and accords you a seat at the table of investments.
- Manage your credit and drive your Interest rates down.
In modern societies, debt is one of our major stressors. African governments are chocking with debt and the citizens are no exception. In Kenya, with a myriad of online lenders charging an arm and a leg in interest, our society is curving into the burden of debt.
Nowadays, debts begin from the time a child acquires a phone and this can be as early as primary school. Then University debts pile and by the time the youngster is joining the workforce, he is already struggling with credit ratings. Yet at work, he has to keep up with peer pressure, therefore, he picks a credit card and obviously a car on loan is the next in line.
As a society, we must demand financial literacy for our youth before they can start accessing loans from cruel lenders.
Some online lenders charge upwards of 15% per month, don’t mention some shylocks who charge 30%. It is important to rank your debts by interest rate, then the size of the debt. That way, when you are paying for them, you are ensuring to start with the big rates and finish with your small rates.
When your interest rates average less than 10% per annum, not a month, then consider yourself on the right side of credit. Before you reach this level, keep track of interest rates on your accounts and continuously find good deals to rebalance your loans. If you hone this skill, it can save you thousands of shillings on your interest annually.
To be a success financially, you must not leave your money idle in a savings account. You must continuously look for ways of investing the money.
As a first step, understand the language used in investment circles so you can intelligently communicate with your new circle of investment friends. Investment lingo includes terms like investing, which means committing your money in an investment vehicle, hoping to make a profit, where vehicles include bonds or debt, stock or shares, mutual funds, real estate, unit trusts, and businesses. The income earned could be interest, rent, dividends, royalties and capital appreciation on sale etc.
Before you plunge into the deep end, you must have a concrete reason why you are investing because it will guide your choice of investments and act as a compass when market conditions change and toss you new risks and opportunities.
Your reason to invest will largely achieve three things; earn income, enjoy capital appreciation and safeguard your wealth.
- Say “No”
More often than not, people will approach you with demands on your time and money. There is a wedding committee, could you kindly join and participate by attending two-hour meetings every week and each committee member is to pay 25k. What about No for an answer?
There are times when you might want to contribute your time and money to a worthy cause, but there are many times you feel pressured into taking on something you don’t really want to do.
Saying No requires courage and by developing a sense of what is important and what is not, you will manage your resources efficiently.
Learning to say “no” and walk away without feeling bad about it can save you a lot of time, money, and aggravation.
- Be efficient
Mike a colleague of mine, a man, purchased a Vitz and we all gave him that look of “ what’s up bro, you should be in a V8”. We were kinda ignorant.
Doing as much as possible with the least amount of resources is called efficiency. Efficiency can mean choosing a hairstyle that lasts 4 weeks instead of a weekly hairdo. It could mean shopping once a month for non-perishables instead of taking multiple trips to the shopping malls where you can be confronted with impulse spending. Efficiency can mean driving a smaller vehicle that costs less and uses less fuel every day.
I lived in my own servants’ quarter for 10 years because I wanted to save in terms of a lower mortgage payment and lower utility bills.
Energy savings is another example of efficiency in action. If you spent a few hours and shillings upfront to upgrade most of the light bulbs in your home to LED, you will save money every month due to reduced power bills.
Another form of efficiency is simply having less stuff. Do you really need eight different tissues holders in your loo? How many pairs does one woman with two feet require? Having less stuff not only costs less but also occupies less space. With fewer things around, it is easier to be organized and find what you need when you need it.
- Re-use to reduce costs
In Africa, most of the items that we use are second hand. In Keny, we call them mitumba. They range from cars to clothes to books and even food. On TV recently, a feature was aired that showed how some eating places in low-income areas were actually getting thrown away food from garbage bins and re-cooking and selling to people who knew and liked it.
In families, older siblings outgrow their clothes which are handed over to their younger siblings. Companies are actually being set up that specialize in waste recycling. However, some people frown on reusing things. Reuses is a skill to save money and live well with less.
Many people throw old things away just because they are old. You can learn to keep reusing items until they no longer work, and then use them for something else. When cotton dress wears off you can get sunburned through the holes in the fabric. Is it time to throw it away? No! use it for a rag.
- Prepare own Food
Food is amazing, actually, it is the major reason people give for missing home. Yet in the current lifestyles, restaurant food, fast food, and prepared food items from the supermarkets is what most of our millennials know as food.
Because the need for food is impulsive, food expenses if not managed can balloon so rapidly that they can be your one singular headache causing you financial issues. Cooking your own meals and carrying your own prepared lunches take some planning and work, but you can save a ton of money and eat healthier, too.
To cook your own food, you need some basic cooking skills and equipment, but most importantly you need a plan for preparing your own food at home. It works best when you make a list of meals and the buy groceries with these meals in mind. Having a weekly dinner calendar can be the difference between not knowing what to cook and ending up with expensive restaurant food.
Insure the things that matter to you. Things you have taken years to acquire can disappear due to accidents in a flash. Medical expenses are best managed via medical insurance. Some of the insurances to have include, medical, Life, Education, redundancy cover and last respects etc.
Insurance helps manage known costs like education and medical while covering you and your dependents in case of unforeseeable occurrences like accidents natural calamities and deaths.
- Build a Heart of Contentment
I am sure that you can live with less, but, can you be happy and content with less? Contentment is living with a positive attitude and being satisfied for all of the things you have instead of wishing that you had more bling.
Part of being content with what you have is to stop caring about what other people think. People who know you respect you from the work that you do to help them and not really what you own.
Contentment means deciding what happiness means to you. In the current social media world, it can be difficult to set your own standards of happiness as you look at the photoshop pictures of expensive vacations, recreational vehicles, and new cars that your friends post. It is hard not to want expensive stuff when it seems like everyone else and influencers are buying it.
In my years of practicing personal finance, I have come to realize that some of the social media influencers that you are admiring are just as blank as you are when it comes to managing money because no one ever taught them how to manage money.
Pursuing happiness by buying expensive stuff will never make you happy because there is always something else you’ll need to buy in order to be happy. As soon as you get back from a vacation in Zanzibar, you will hear that your friend was in Miami and you have to start thinking about where to go for the next one.
After one year, your new phone isn’t the newest on the block anymore and the excitement is gone, you want the new arrival model. Buying happiness is like chasing a shadow. You can’t really reach happiness through buying things; the result is always that you spend a lot of money trying!
Contentment is about finding happiness in the life that you have right now, not the life you could have if only you had more money.
As you step into the brand-new year, which of these personal finance skills will you master to improve your life the most?
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