Saturday, April 2, 2016

How to Adult: Personal Financial Management Tips

What exactly is personal financial management? A quick definition: "The efficient and effective management of money to accomplish objectives." Definitely a skill I wish I had picked up 6 years ago!

A few months ago, I attended a training on the topic hosted by the Young Women Social Entrepreneurs (Nairobi) network (of which I'm now a board member). The trainer was my eldest sister, and I really wish I'd thought to ask her about this before! Since attending the training, I've become much better at saving, which is especially helpful now that I'm working as an independent consultant.

Who knew it could be as easy as this?

What do I want you to take away from this post? Learning how to manage your finances is an achievable goal- not in the distant future, but soon. Financial independence is not something you need to worry about.

What are some of the mistakes we make when it comes to managing our money?

  • Not prioritising savings
  • Having a very vague idea of where your money goes
  • Forgetting non-monthly expenses in monthly budgets
  • Spending more than we need to
  • Living paycheque to paycheque
  • Getting into unnecessary debt
What are some ways we can get around this? 

1) Prioritise savings: A major change I made in the last few months is to treat savings as an expense- and to make this expense as soon as I have any money coming in. A lot of the time, we may transfer money to savings, but in our minds, we still 'have that money', and so tend to overspend, thinking that savings will cover our expenditures. Savings should be something that are put away and not touched, unless they're being used for a specific goal, like retirement, education or travel. If you think of savings as an expense, and teach yourself to put money away as soon as you get paid, you'll be able to save quite a lot in no time. 

How much should we save? This really depends on your personal situation, but ideally, when you're younger and (presumably) don't have as many expenses, you should be putting away as much as 20% of your income. You may think you're too young to start saving for retirement, but trust me on this one- no one is too young to start saving for retirement. Every little bit counts; I've heard of many families and individuals who started gathering loose change in containers, and would open them after a few years. 

How should we save? While having a savings account is a good idea, often enough, in some countries especially, the interest rates just aren't worth it. If you are serious about putting money away, think of doing a fixed deposit or something similar, or doing some research into various investment options. 

2) Know where your money is going: You may think that you have a rough idea about how much money is going in and going out, but keeping track of this in an exact manner can help you identify your spending patterns, and learn where you can cut down or even spend more. Luckily for us, there are various desktop and mobile apps available to help with this, and if you're so inclined, you can use a good old spreadsheet of your own. 

Personally, I use Toshl- it's very user friendly, and allows you to see exactly where your money is going. Since I started using this app, I've been much better at staying within my budget. 

3) Create a budget: By allocating certain proportions of your monthly income to certain expenditures, you can ensure that you won't overspend. An example of this would be allocating 10% to retirement, 10% to general savings, 10% to irregular expenses, 10% to fun/entertainment and 60% to needs. When creating a monthly budget, don't forget to include non-monthly expenses- divide annual expenses by 12, and track them as monthly expenses. 

4) Cut out unnecessary expenses: Do you have a magazine subscription that you barely use? Or maybe you spend at your local coffee shop every day when it'd actually be cheaper to buy and make your own in the long run? Are you paying for a storage space you don't really need, since you could just move what you have into a space you already own? 

Sometimes, we end up spending on things that are absolutely unnecessary. Once you start tracking your expenses, you'll realise how much you can save by cutting out these expenses. It may seem like cutting down on just two coffees a week won't save you much, but look at it this way- say for example, each coffee is $2.50. You'd save $5 a week, so $20 a month- $240 in a year! 

5) Do not live paycheque to paycheque: This is a mistake so many of us make, and don't realise how dangerous it can be. If it means that when you start working you need to cut down on expenses to prioritise savings, then that's what you should do. Ask yourself- if you were out of a job today, could you survive at least three months on what you've saved so far? It's important to have a bit of a cushion to fall back on, and if you live paycheque to paycheque, you won't be able to build this up. However, if you budget wisely, save early and start tracking your expenses, you'll have a safety net in no time at all. 

6) Avoid unnecessary debt: We live in a debt culture, where people tend to borrow and then overspend, with the goal of paying back 'someday'. As much as possible, debt should be avoided, and only taken on for necessary things. What are these, you may ask? A good rule of thumb is to only take on loans for essentials like education and housing that will add value to you, or increase in value over time. Do not take loans for things like cars- they depreciate as soon as you drive them out of the showroom. 

Credit cards can be amazing if used right, and can actually result in you saving money and earning rewards. When using credit cards, it's important to remember to pay them off monthly- use them as you would a debit card in a way. Avoid using debt as a crutch for expenses you don't really need to make. 


Hopefully, these tips will take you a little closer to the financial independence you've always desired! Have any others? Feel free to share in the comments below!

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7 comments:

TW said...

I had a senior colleague tell me once - his father told him to put aside 10% from his very first salary into a dedicated savings account & then 'forget' about it. From the balance, to have a budget planned with one item being - just spend & blow the amount on whatever.
This man started doing this at age 19! Today, he has real estate in a couple of countries, takes a holiday every year, and has never bought a car by taking a loan! He has the cash - he buys!!!
Wish I had that advice when I was younger.

Crystal Olisa said...

Great advice, working on getting better at this myself. It's easier now that I have a goal, so I'm aiming for 40% 😅 wish me luck!

Roshni Walia said...

Thank you, TW! That is great advice- and the earlier we start, the better.

Best of luck Crystal! I'm sure you can do it :)

market neutral said...

It's true!Learning how to manage and grow your money is the only way for getting rich.

Elizabeth Wilson said...

Great suggestions, Roshni!

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diego78 said...
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