It is said that your financial situation is as a result of every little financial decision you have made up to this time. Most of us have – at best, little or no coaching or worse – the wrong coaching regarding financial matters. We therefore learn through mistakes, hopefully of others, but painfully more often than not, ours. Here are a few mistakes that we should avoid.
1. Saving Last
Most people have a policy of saving last. After getting an income, they will pay for their expenses and entertainment, then save any surplus. The problem with this policy is chances are there won’t be any surplus to save. The recommended policy is to save first before doing anything else. It helps if you know what percentage you are saving- most people recommend 10% of your income. Remember, savings and investments are different. The two, together with your tithe (or alms/ zakat) if you pay that ought to be the first payouts from your income. Finances: Tools To Enable You To Save More This Year
2. Excessive Spending
You do not get into a financial crisis by losing a huge amount in a day. You get there by losing a few shillings every day. That 10,000 shillings you spend on drinks and partying every week translates to half a million shillings in a year. This is money that can go towards a mortgage for a house or other expenses. I am not saying you should not have fun. Unwinding over the weekend is important. The partying is used as an example, and there are many more ways we spend more than we ought to. The amount used is also relative. For example, someone earning a million shillings a month can comfortably use 10,000 for entertainment a week. However, if you earn 50,000, you will be in trouble if you spend the same amount in entertainment.
3. Paying Off Debt with Savings
So your loan earns an interest of about 17% while your savings earns an interest of about 7%. It may seem smart to pay off your loan with your savings then add the loan repayment amounts to your savings. It is not. For one, once you pay off your loan, you do not have the same urge, push and motivation to save. However, if you are sure you can be disciplined and treat the savings as if it is a debt, then you can have an emergency fund and prioritize on paying off the loan, not using the savings to pay off the loan. If you save 10% of your income, you could start saving 5% then increase your loan payments by the 5% from your savings until the debt is cleared, then continue saving 10%.
4. Having too much month at the end of the money
It is 18th, and all your money is gone. Pay day is 12 long days away. Your only option will be to borrow money, most likely at an interest. Since banks are trying all they can not to give loans, your shylock guy will charge you anything from 20% to 30% per month. Even Mshwari is 7.5% per month. It looks meagre until you realize 7.5% per month is about 138% per year. If too much month is left at the end of your money, it makes you get into more debt which continues eating into your money. The best way to avoid this is to pay off all essential expenses of the month like rent, electricity etc, then divide the money in weeks for the daily or weekly expenses, and also ensure that you do not ‘borrow’ next week’s money to use this week.
5. Not Saving for Retirement Early Enough
You just got your first job at say age 25. Retirement is 35 years away. You have more time than you have lived, yes? Believe it or not, that is the best time to start saving for retirement. According to the latest edition of the Actserv Investment Performance Survey, pension schemes are giving an average return of about 7.8% per annum in the long run. Contributing Kshs. 5K from age 25 to age 60 will get you over Kshs. 10M at retirement. If you start at age 30, you get Kshs. 7M. If you start at age 40 and double the contributions (to Kshs. 10K from Kshs 5K), you will retire with less than Kshs. 5.7M. If you start at age 55 and contribute Kshs. 50K, you end up with Kshs. 3.6M. The point is, start saving now, if you have not started. Why everyone needs a retirement benefits plan
6. Not Building up an Emergency Fund
It does not matter how comfortable you are, if you do not have an emergency fund, you are in deep trouble. Emergencies have a tendency of cropping up at the worst possible time, and can range from all manner of things. The not so worse scenario can be your car engine knocking. This will set you back anything from Kshs. 100,000 if you drive an average car to about Kshs. 350,000 if you drive the most affordable German vehicles to over Kshs. 2M if you drive a high end vehicle. If you do not have an emergency fund, you will probably get this money from your savings or worse, have to borrow if you do not have savings. Other scenarios where an emergency fund can come in handy is when in between jobs.
7. Not Investing
The myth out there is that you need a lot of money to invest. Truth of the matter is that, you do not. 75% of the companies listed at the Nairobi Securities Exchange are priced at less than Kshs. 50 per share. Meaning, you need less than 5K to invest in any of them. Savings are good, but will only get you so far. Banks now give an interest of about 7% per annum on savings meaning if you save Kshs. 5,000 per month, after 10 years, you will have over Kshs. 800.000. Investment in stocks (like the Nairobi Securities Exchange) give a return of over 22% per annum over a long period of time. Investing Kshs. 5,000 per month can build your portfolio to over Kshs. 1.6M. To put it into perspective, the Safaricom Initial Public Offer of Kshs 5 was only 9 years ago. Today, the same stock is worth over Kshs. 20. Anyone who invested Kshs. 100,000 in 2008 now has shares worth 400,000 and that does not include the dividends (which could be over Kshs. 20,000 over the 9 years). This is not to say you invest all your money and not save it. Saving is as important too. I always recommend saving and investing 10% respectively of one’s income. Saving or investing, which way to go?
These are but a few financial mistakes that you should avoid. There are many more. The bottom line is watch your expenses, save, invest and contribute to a pension scheme. Here is a guide on how to start – Planning for the future; How to create a Financial Plan.
Featured image via engineeryourfinances.com.