Me & Money
By Joseph Wachira Kimani
Imna and Jimnah Insurance Agency
Kenya boasts of a highly educated population with high income levels, but they can be just as ignorant about financial issues just as people with less education and lower income. When it comes to money, we all make mistakes and some of the mistakes are too costly to bear. It is up to us to find ways to avoid making the money-mistakes that will take the rest of our lives correcting. So how do you make money work for you? What is it that you want from your money?
1. Why money is important to you.
Knowing why money is important to you will guide you on every financial planning decision moving forward. It is easier to say no to things when you have a much bigger yes.
- Career
- Personal Development
- Family:
- Education
- Health
- Holidays
- Home
- Retirement
- Investment.
2. Where do you want to go?
Many people feel as if they're adrift in the world. They work hard, but they don't seem to get anywhere worthwhile. A key reason that they feel this way is that they haven't spent enough time thinking about what they want from life, and haven't set themselves formal goals. Knowing where you want to go will enable you to ask for the directions. Most people don’t really know what will happen in their future, especially on the 10 or 20-year time frames sometimes addressed in financial planning. No matter what, make a projection of that future and don’t worry about getting it “right.”
The biggest reason why people don’t achieve their desired future is Poor Financial Planning - lack of goals.
3. Know your starting point (Current lifestyle)
In order to get where you want to go, it’s important to know you’re your current position: Income, expenses, debts, family, net worth, assets, liabilities etc. Some people may even be so ashamed of their past actions they will feel like avoiding this step. Focus on learning from those mistakes and on moving forward, not on pointing fingers, wallowing in guilt or engaging in avoidance. This will help put your future into perspective.
4. Think of budgeting as a tool for awareness.
Often, people base spending decisions on emotional reasons, and then go looking for evidence to support that decision. Instead, we should be more deliberate about our purchases. Budgeting can help to turn around bad spending habits, but it shouldn’t be seen as a punishment. Budgeting should be seen as a tool for tracking spending: The process of tracking will equal awareness and awareness will equal behavioural change, leading your spending to align with your goals.
5. Save as much as you reasonably can.
Decide the portion of your income will go into savings. Save as much as you can especially when you are younger. However, it’s highly recommended that on average the client should commit a minimum of 15% - 20% of their gross income towards long term savings. If you have gotten clear with your values regarding spending, and you have some awareness, then savings is a natural outgrowth of that.
6. Paying off debt can be a great investment.
Being in debt can be an overwhelming and debilitating experience. Therefore knowing how to manage your debt is crucial to paying off debt and reaching financial success whether it is credit cards or student loans, pay off your debt FAST. If you just have a little debt, you have to keep up your payments and make sure it doesn’t get out of control. On the other hand, when you have a large amount of debt, you have to put more effort into paying off your debt while juggling payments on the debts you’re not currently paying. Debt has a cost associated with borrowing. Paying off debt is a great investment.
7. Invest like a scientist.
Assume that you practiced medicine the way you invest, how many of your patients will be alive today? Before prescribing anything you will read peer-reviewed studies to gain confidence that you are making the right choice, but with investments, probably you will get recommendations from friends and go with gut feelings or by what you heard on the news without doing your own research.
The basic formula for successful investing:
- Diversify your portfolio.
- Keep your costs low. Research shows that there is only one reliable predictor of how well an investment performs: cost. The more you pay for your investments, the less money you’ll end up keeping.
- Recognize the correlation between risk and reward. The greater risk, the higher potential return. This doesn’t mean to bet it all on one stock, but to recognize you’ll likely earn more for stocks than for bonds, that you’ll probably make more via small companies than large ones, and that you’ll most likely have greater returns from financially weak companies than strong ones.
8. Hire a real financial advisor.
It’s difficult to be unemotional about your own money. That’s the real purpose of having an advisor. You engage one because they’re not you. A financial advisor will help get between you and any potential mistakes you may make, even if you were to be in danger of making financial blunders every five or ten years.
9. Behave for a really long time.
Having the plan in the first place will help you stick to your goals. We recommend automating your decisions so you don’t have to rely on yourself to keep making good choices over and over again. Then, be sure to leave your plan alone. Would you ever plant a tree and then go in every month and dig it up to see how the roots are doing? Probably not!
Looking forward to a fruitful and purposeful investment journey with you. I hope that the information above will aid in achieving financial freedom that we all seek to achieve.