Personal finance is the tradeoff between consumption on the other hand and savings and investments on the other hand. More today implies less tomorrow. The rule of money is simple, save me today and I will save you tomorrow. We are not trying to outsmart those with PhDs and CFAs in finance. We just want to know enough to be able to ask ourselves and others the right questions and make better decisions.
A professional is someone with expertise in a certain field. One is therefore likely to visit a doctor if they fall sick. For personal finances, however, most solutions are with us. Personal finances help us achieve our goals and no one understands our goals better than ourselves. You are therefore the professional of your personal finances.
To succeed in managing your personal finances, you need three things:
- The correct mindset
- The toolset
- Skillset to help you make good decisions that will help you connect your personal finances and personal goals.
The mindset is built by habits which put us in motion to create sustainable wealth eg the goal of saving KSh60,000 might seem difficult but the habit of putting aside KSh5,000 every month requires little effort.
Habits, not goals, make otherwise difficult things easy. Sustainable wealth creation follows a rhythm. When it comes to planning for one’s finances, it is better to stop wishing and start doing. Review your income, spending, debts versus your long term and short term goals and see where you can make adjustments.
Write down your budget. 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. An accurate monthly budget can help you reach your financial goals, whether you’re saving for a car, buying a home or raising capital to start business.
You can use budgeting apps such iSave, Fudget, Mint, YNAB or an excel spreadsheet. It is recommended that you save at least 10% of your net income for a start. Even if you save a little, that’s fine too-the important thing is that you get into the habit of saving. Your future self will thank you for it.
By sticking to a budget, you can save thousands each year and avoid overspending. Budgeting allows you to track your expenses and hence is very important in the journey to building your financial future.
The toolset refers to what you need to manage your personal finances well and include budgeting apps and products from the financial services companies such as standing orders that allow you to automate savings. You can also use lock accounts such as MPESA lock account, Barclays Timiza Zidisha account or KCB M-PESA target account.
Money market funds such as CIC and Britam Money Market Fund also serve as great platforms for saving money while earning interest that is above the inflation rate. They have capital preservation which means that your principle is protected from losses hence ensuring safety of funds.
The skillset refers to your awareness of the financial products, investments and options at your disposal. Remember personal finance is not a one size fits all. Making a connection between financial markets products and investment options and what is personal to you is what matters.
For example paying your loan in time will help you improve your credit rating and help improve your chances of getting loans in future. Your credit rating might be required by your future employer or investors interested in investing in your business. It is therefore important to understand your individual scenario and apply what is relevant you. What works for others may not work for you and vice-versa.
Robert Ochieng is CEO of Abojani Investments, A digital first personal finance company.