Imagine you are planning to take your family for a well deserved Christmas holiday. You would first have to decide where to go. Then, you have to decide on how to get there. You may drive, fly, or use the services of a tour company, noting that the choice will depend on a few factors – budget, time, convenience and practicality. However, you may also need to think of a contingency plan, just in case something happens along the way, like your car or the tour van breaks down, the flight’s delayed or even a road detour!
Financial planning basically is the same concept, once you determine where you are now; you can get a better picture of what you need to do now to enable you to achieve your future desires.
Example: If you want to acquire a house worth 12 million in five years time you could either decide to save for it, take a mortgage or better yet make your money work for you. Now the figure in itself would discourage most people but there is a way of getting the house of your dreams once a sound financial plan is put together.
The starting point is to understand the various types of investments or tools we can use to aid us achieve our goals faster, commonly they are referred to as asset classes. They are divided into;
1. Assets that generate income e.g. land where rent is the return you get for your efforts.
2. Assets that protect your money e.g. investments in treasury bills, or savings in the bank, where the return is interest.
3. Assets that increase the value of your money e.g. shares where the increase in the value of the share adds to your overall value (capital gain).
There’s no magic formula to saving money and creating wealth, but there are a few good money habits that can aid you in the journey. It comes down to three things:
Budgeting
Paying yourself first
Spending less than you earn
Seems very easy doesn’t it? Well, it really is, but that doesn’t mean it’s easy to do. Here’s how you can tackle the three secrets to saving money so that you begin building wealth and getting out of debt.
The secret to tackling the three steps is simply deciding to be disciplined and to do it IMMEDIETLY.
1: Budgeting
This will easily show you where your money comes from and how you eventually spend it during the course of the month. There’s simply no way around it. Having a budget will act as a guide and you can then decide where you can cut expenditure and voila!! You will realize there is extra cash that you can channel towards savings and or investments.
Initially you will feel like it’s out of your element, and very boring, with time the picture will be clearly drawn out as you get to find out where your money is going. Going forward you will spot trends and problem areas which can be worked on to ensure you are on the right course.
2. Paying Yourself First
To pay yourself first means that: Before you pay your bills, before you buy groceries, before you do anything else, set aside a portion of your income to save. By changing our good old car for the newest model in reward for the hard work you have put in over the years or replacing your “not-so-trendy” cell phone to the coolest model with the latest operating system does not cut as paying yourself first, in the long run you will have affected our retirement nest egg without realizing it.
Though our Wants are infinite, our resources are finite! Financial Planning will help you realize and understand that in life, there is always Trade-Offs or Sacrifices that have to be made to achieve the overall picture.
3. Spend Less Than You Earn
This is the holy grail of personal finance. You simply have to spend less money than you earn and there’s no way around that. It’s all about cash flow.
If you earn Ksh 50,000 and spend Kshs55, 000 you’re now at a deficit of -Kshs 5,000. Where does that extra five thousand come from? Usually it’s borrowed money, either from a credit card or some sort of soft loan. That in itself automatically comes with interest, so in reality you are more than Kshs 5,000 in debt.
On the other hand if you earn Kshs 50,000 and spend Kshs 45,000 you now have Kshs 5,000 surplus, what you do with the extra amount will determine if you will actually achieve your goals, and how fast you do so. Putting the extra money towards an emergency fund would be a great start as this acts as a cushion in case of any unforeseen circumstance.
Short of winning the 2929 SHINDA SMART, there are no secrets to building wealth.
‘’One thing is certain. If you can budget your money so that you are spending less than you earn and put some of that money into a savings or retirement account before you have time to spend it, you will be able to save money and build wealth.’’
Elizabeth Karina.