Happy New Year!
Another year has started and I am sure we are all in that phase of making New Year resolutions and promising ourselves that this will be the year of change in various aspects of our lives.
The same is probably sure to apply to our personal financial lives. We may be thinking I need to pay down that credit card, I need to save to buy a house, I need to find out more about mortgages or indeed clear my mortgage, I need to save and invest more, I need to get that life insurance policy etc. It ultimately leads to we all want to be handle our finances better in 2011, make better decisions and form better financial habits.
As I was writing this article given that people are in a refreshed frame of mind, I wondered what would make this particular piece different from all the other New Year Personal Financial Tips that have been stated and reread over and over again. I mean we have all heard the famous mantras of create a budget, set financial goals, pay down debt, save more etc. So in that respect what is the one aspect I can throw out there to motivate people to look at things a bit more differently. What is it that I can possibly tell you so that something changes before the first paycheck of 2011 hits your bank account?
Your financial situation in 2010 was a result of your past thoughts and actions. There are always excuses for not taking action with our money. I don’t earn enough, I can’t cut down my spending, I don’t know how and where to invest etc. What I can start by telling you is about the real price of I can’t and hope that this year you will refrain from thinking “I can’t” in aspects of your financial lives and this will consequently translate into your adopted financial habits for the year. Consider the following common excuses:
1) I can’t save: If you spend Kes 200 on lunch every day that amounts to Kes 4,000 every month. If you invested this at return of 15% p.a. every year for 15 years you would have accumulated Kes 2.7 million shillings. For the same amount we pay for Cable TV, you would have accumulated Kes 4.7 million. This can definitely help as you plan for retirement.
2) I can’t pay down my debt faster: If you take a loan of Kes 2 mn for 5 years at 15% p.a. you will have paid interest of Kes 879,000 by the end of the period. The interest component is virtually 44% of the initial loan amount. If you put the money that you would have spent on Cable TV and lunch towards repayment of this loan, you will reduce the interest you pay on the loan to Kes 649,000 and the time period from 5 years to 4 years. If you have a 20 year mortgage of say Kes 6 million. If you put in additional payments of Kes 10,000 a month you will reduce the total interest paid by Kes 5 mn and the time from 20 years to 13 years. This makes you really start analysing what you actually use debt for. Is it worth the expense?
3) I’ll save and invest later (read I can’t do it now): If you would like to sustain a lifestyle of Kes 100,000 per month even when you retire you will need approximately Kes 62 mn worth of investments that are generating an income. If you start saving in your 20’s assuming investments will earn 15% p.a. you will require to put aside Kes 4,200 per month. If you start saving in your 30’s you will need to put aside Kes 20,000 a month to achieve the same result. In your 40’s you will require 92,000 a month and in your 50’s you will need Kes 700,000 a month.
So in line with the above scenarios my advise to you is to stop using I can’t as an excuse and always start with the end in mind. What do you want money to do for you? Time and Information (networks) are likely to be your largest resources in the quest to create wealth. The more time you have the more you can accumulate but also your networks are the gateway to opportunities that offer extremely attractive returns hence shortening your time period. Awareness of the end result in monetary terms puts a new perspective on the habits that you must now create such as budgeting, proper handling of debt, investments etc. So for 2011, before your first paycheck remove “I can’t” from your financial vocabulary and have a target number for the year in mind.
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