From piggy banks as children and investments as adults, we all grew up with an idea on the value of money and there is no such thing as free lunch. Money is just a means to an end. Financial awareness is very important to ensure that you go out into the world of 2020 and the years to come knowing how to make smart financial decisions. Whatever issue brought you here—the desire to control your spending, get out of debt, finally start saving, overcome the fear of investing, or to take a leap towards accumulating millions, let look at 7 ways to take charge of your personal finances in 2020.
1. Examine your values
On a basic level, nobody wakes up to go to work then get paid to watch their bank accounts fattening. Money helps you put food on your table, pay rent, move from one place to another and do more. After paying for the basic stuff known as needs you need to accumulate money to help you with eg buying the things that you want or be able to achieve your life goals such as buying a house or raising capital to start a business. You can also invest the money and have it earn for you accumulated interests. Money can also give you freedom eg you can save enough to help you not work for some years or go for a holiday to a destination of your choice. Your values will help you build your relationship with money. Behind every personal decision you make with your money is human emotion. When you can learn to understand and control that emotion, you can learn to save money on things you don’t value and have more money for things you actually want.
2. Create a budget
A written budget helps you track your income and expenses. It is important save part of your income for reasons that we will look at in the subsequent points. Many people only create mental budgets. Putting your budget on paper or in a basic spreadsheet is essential if you want a healthy financial future. Track each and every expense and group them into categories that relate to your personal goals and values eg self-development, investments, child’s education, leisure etc. Be smart with your expenses, and cut back on as many luxuries as you possibly can. Be careful when it comes to choosing your fixed expenses. Luxuries may seem like small expenses, but they add up quickly.
3. Build up your emergency or rainy-day fund
Picture yourself without an umbrella on a rainy day. It’s ideal to have several months of living expenses saved, but any amount is better than nothing. As a general rule of thumb, it’s a good idea to keep six months’ worth of your expenses in a readily accessible account. It’s important to mention that this doesn’t include your pension or other investments — this is a separate account that exists for the sole purpose of handling unexpected expenses.
There’s no one-size-fits-all magic formula but you should use this guideline for a start. The emergency fund will become handy on a rainy day and help you avoid unnecessary debt. It’s pretty much unacceptable for any adult to have no savings, but when you’re a decade or two into your career, it’s even more troubling. So if you’re without savings in the bank or unit trust, take a look at your budget, or create one if you’re not using one yet, and see where all of your money is going. Chances are, you’ll find at least one or two expenses you can cut back on without completely altering your lifestyle, such as lowering your pay-TV plan or going out less frequently.
4. Pay off short term debt
Debt can be a big financial distraction as it can lead to us losing focus of our long term goals. Clearing debt or part of it is an investment because most loans have repayments interests that are higher than savings or money market accounts. Write down all the loans that you have including the name of the lender, the outstanding amount, monthly installment, when the debt is due, term of the loan and interest rate. There are different ways of paying off debt; one of them is the snowball debt management method. It involves paying off the smallest debts first to get them out of the way before moving on to bigger ones. The second method is the avalanche debt management method. It debt avalanche method involves making minimum payments on all debt, then using any remaining money to pay off the debt with the highest interest rate. Paying off debt is like losing weight. You cannot do it one day hence do not feel discourage or overwhelmed. Most people take years or months to clear debt, some not so long and some not so short.
5. Set up a retirement account
Our expenses will continue even in the years after we have become less productive or retired. It is therefore important to plan for your future. The two elements of retirement are HC (human capital) and FC (financial capital). As you age HC reduces and ideally FC should increase. At retirement, FC should be sufficient to cover HC which is now gone. HC is the Present value of the income you can earn from jobs or businesses and side hustles. FC are the assets you invest in. Remember depending on your job, skill, employer HC can be very secure or at a risk of being lost. This should help determine how fast you want to build your FC and how much risk you want to take.
6. Save and Invest more
What remains after budgeting for your expenses should take precedence when your income checks in. The secret to increasing your savings — whether it’s earmarked for your emergency fund or another savings account — is to pay yourself first. Put the money into a designated savings or investments account before you pay anything else. Rather than trying to save or invest the money that remains at the end of the month, put it away first—before it gets eaten up by other expenses or you’re tempted to spend it. There is always an opportunity to imbibe streetwise five at KFC, buy an item you didn’t plan for or press the Mpesa or mobile app send button simply because you can. Do not invest in something that you don’t know. If you find yourself in a bad financial, take action immediately to get out of the situation because you don’t know how bad it could get. Some of the investment options to look at in Kenya in 2020 include money market funds such as CIC or Britam Money Market funds, the stock market, treasury bills and bonds, real estate etc. You need to learn about the asset class and do due diligence before investing.
7. Seek an accountability partner
Join a community of like-minded people and get a professional financial advisor to help hold you accountable in achieving your personal goals on investing debt management and investments. You should put significance to the future and long term thinking which the cornerstone of investing. With discipline, you can be able to do so much with so little in the long run. Happy Investing!
About the author; Robert Ochieng is the Founder and CEO of Abojani Investment. Abojani is a digital-first personal finance company that trains people on personal finance and investments. The next class starts on 6th January 2020 and will run for 3 weeks. Abojani Investment Masterclass will help you master your personal finance and investments. Participants learn about budgeting, saving, debt management and investing in our Abojani Investment Masterclass. After the course, you will be ready to save more, clear debt if you have any and invest in unit trusts, stock market and treasury bills and bonds.