Sheila* wrote to me a few days ago and said that her emergency fund did not work. Sheila has recently been retrenched but that’s not the problem. While working she had tried to plan her money well. She has been working with a monthly budget and she saves. When she was retrenched she had an emergency fund, which should have been able to cover her expenses for four months or so she thought. However, her funds are dwindling fast and she has not increased her expenses. Or so she thinks. Where did she go wrong? It’s admirable that she did keep a budget but that was clearly not enough. For many of us we budget on what money comes in and what money goes out. We forget that this at times may not necessarily reflect our true cost. Instead of simply drawing a cash in, cash out budget; understand the ‘cost of me’ (Click to Tweet this thought).
What does your life actually cost. What might Sheila have forgotten? Maybe certain things were paid for her at the office. Many people do receive certain allowances. It could be a phone allowance, entertainment allowance, housing allowance. It could be that your fuel is paid by the office, you are allowed to put certain expenses on the office credit card, your Wi-Fi is paid for instance etc. Let’s not forget the important medical bills and/or medical insurance. Sheila has probably never had to buy things like pens because she could always get them from the office. It can be small things like these that add up and distort your planning. So without an income and assuming she maintained the same life, there would be other things that are directly using up her funds that weren’t there when she was working and since she was not aware she did not incorporate them into her planning. Your true cost includes all your expenses irrespective of how they are paid or where the money comes from. Sheila has found that her true cost is higher than what is displayed in her budget. Her emergency fund was planned within her budget and not her true cost. That is why it is diminishing a lot faster than she expected. The correct way to have done her emergency fund planning was to base it on the higher amount or when she did get retrenched, reduce a lot more of her expenses.
There are people who travel because of work a lot and this distorts planning because they do get generous travel allowances that they are able to keep and use for various lifestyle costs. If they travel often enough it becomes the norm and these allowances are incorporated into the spending plans. When they stop travelling and/or move positions these allowances are no longer there. The problem they face is they adjusted their lives on the assumption of that income. Their true cost is way bigger than the normalized income that they receive. Young people who are still being supported by their parents in some way make this mistake a lot. They move out of home without doing research on what it actually takes to eat three meals a day, pay for electricity, water, gas, transport etc. They assume that just because they have enough to pay the deposit, rent and furnish the house they will be OK. In our teenager’s class we teach them to calculate what they cost their parents and it is always amazing to see the shock of realisation on their faces. Most think they cost parents the allowances they receive and a little extra for food and school fees. Many people move jobs for what looks like a higher income but fail to incorporate what expenses the current employer pays for and the prospective employer will not. So salary negotiations are already on the wrong basis and the increase doesn’t quite add up to the way it should be. For example, if your current employer is paying for phone charges and fuel and you move because of a Kshs 20,000 bump in salary, there may not be much financial benefit realised. Many domestic workers make mistakes because of not understanding this. They move only to find the new place is not giving food, accommodation, school fees allowances etc.
Couples do make a lot of mistakes when planning. Many do not plan for emergencies properly because of the way finances are managed. In two income households for practical purposes, there is separation of bills. One person could pay the rent/mortgage and another person could buy the food. In an emergency all the bills may fall on one person. Say Sheila in her house was paying for food and bills. It now means her partner will have to pay for that until she lands on her feet. If something happens to one person’s financial ability for a number of circumstances it still affects the other person. Rent or mortgage still needs to be paid, food needs to be eaten, kids need to go to school even if it’s borne by one income. Plan for that. For those in business, this is one compelling reason to separate personal and business expenses. When these two categories are intertwined you do not get a clear grasp of your true cost. You can’t just plan what to earn, what to spend, what to save or how to deal with emergencies. Don’t just do a budget. Understand the true ‘Cost of Me’ (Click to Tweet this thought).
Waceke runs a Personal Finance & Wealth Creation program at Centonomy. For details email her on waceken@centonomy.com | Facebook/WacekeNduati| Twitter@cekenduati
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