We are fast approaching the middle of the year. Before we know it we will be celebrating Christmas and ushering in a new year. As you made you resolutions at the start of the year, some of them may have included financial goals or habits that you wanted to cultivate. Like any successful plan, it needs to be looked at constantly and reviewed to make sure that you are on track. Here are several tips to follow as you do your midyear review:
a) Setting Financial Goals: Look at the Goals that you set at the beginning of the year. How much progress have you made? What needs to be done during the remainder of the year so that you can still achieve your goals? If you did not establish any goals, do so now. There is no rule that says this can only be done at the beginning of the year. Remember your goals need to have a specific number and time frame. Any goal without this is simply a slogan. If you want to make an investment, pay debt, plan for a holiday- say how much and by when. Then break that down into shorter time periods so that you can track your progress accordingly.
b) Your Spending Plan: No financial plan can make sense without a spending plan. The company you work for or own has its own budget that is followed and monitored. Without this, the goals of the company will not be achieved. A spending plan or personal budget highlights what your income and expenses are on a monthly basis. It also then shows what can be saved or invested on a monthly basis? Various financial experts recommend saving at least 15%- 30% of your income. I would recommend at the very least 30% and this number is directly linked to how much you will need to retire comfortably and maintain the same lifestyle.
c) Create an Emergency Fund: Whether you own a business or you are in an employment an emergency fund is completely essential. Just to be clear, this is not the fund you dip into when your relatives come calling. To illustrate the importance of this, take your current assets (what you own) minus your liabilities (what you owe). The figure that remains is what you are worth financially speaking. Divide that number by your monthly expenses. This shows you how many months you can survive without another source of income. Your emergency fund should be able to provide for 6-12 months of monthly expenses should anything happen to your source of income. It should also be kept or saved in cash or instruments that can easily be converted to cash like a savings account. Your don’t after all want to have to depend on sale of your property to provide day to day living expenses in case of an emergency.
d) Managing your Debt: Debt can help us achieve our goals faster but when managed poorly it can make sure we never achieve our objectives. There is Good Debt (debt used for investment purposes) and Bad Debt (debt used for consumer and lifestyle purposes). Make a plan to reduce and pay off your consumer debt (bad debts) as soon as possible. For example after looking at your spending plan, you may be able to cut down on your entertainment expenses by a certain amount and apply that towards paying down your debt faster. By doing this you will reduce the overall amount of interest that you are paying as well as cut down the time period of the loan. There is no point putting money in savings, if the amount of money you are paying in interest on your loans is more than the return you are getting on your savings or investments. It may feel better psychologically, but you are better off accelerating your loan repayments on your bad debts and then after completion using the cash flow you have freed up to make investments.
When you feel your finances are out of sync, it will affect various areas of your life. Whether you like it or not money will affect our personal relationships, our work performance and even our health so it’s worth taking time to look at it. Tools to help you review your financial position can be found on my portal at www.moneycentral.co.ke. Remember we need to show our money the same respect, care and attention that we do on other important areas and relationships in our lives.
Waceke Nduati-Omanga -waceke@centsiblewoman.com