The importance of managing finances
It is ironic to be writing about finances as I have had my own share of challenges, but I know of so many people who are faced with this obstacle. It is for this very reason I thought it important to share. The key is to avoid falling into a bad habit early on and also address it once you are aware. It is better late than never.
Learning to manage your finances early in life will give you a head start for financial success. Sometimes we focus so much on managing our income that we forget to manage the expense portion. Consider these two scenarios and determine who would come out better in the long run.
a) A single mom earns $95,000 a month. She lives with her sister and has the following expenses: rent including utilities, $40,000; food - $20,000; transportation - $8,000; spending money - $7,000. She is able to save consistently $20,000 per month, which she invests in a mutual fund paying 12 per cent per year.
b) A single man earns $240,000 a month, however, he rents an upscale apartment for $95,000; utilities - $20,000; car payment plus insurance - $70,000; food - $15,000; and entertainment money - $40,000. No savings or emergency funds.
Though there is nothing wrong with having the things you want, it is also important to plan, prepare, and prioritise.
Society will tell us that the single man is in a better financial position because on the outside it appears so, however, if we looked again at these individuals in five years with everything else remaining the same, the single mom would have over $1.3 million dollars saved. The single man at that point would just be paying off his now five-year-old car (a depreciating asset). He would still have no savings, and most likely, would want a newer car, thereby entering into another car loan for, quite likely, another five years. By then, the single mom would have over $2.6 million saved. This YouTube video helps to support this message. https://m.youtube.com/watch?v=LXXH4Fm9qh8.
Now, the first thing you may think is, 'well, I don't make enough money to save'. Are you 100 per cent sure of that? Most times, we never really look to see where our funds are going. We know the big expenses, but for the other "little" stuff, we tend to rely on mental math, which some of us are not good at.
There are many ways to save money. All we need is to commit to exploring and being open to new ways to save. How many of us check our grocery bill, receipts, or are in the habit of checking our utility bills? The only time we really question changes in our bills is when they are high or outrageous.
How many times have we gone back to check if we are really watching all 200 TV channels or just three or four. Is my Internet plan of 200Mbps really much different from 100Mbps? Am I using all of my minutes of my phone plan? Am I eating out for breakfast, lunch, and dinner? Am I really going to spend US$100 repeatedly on an all-inclusive party when I don't even drink or I am allergic to seafood? We are always faced with choices.
Sometimes it's not until we face a crisis that we start to make changes that are crucial to gaining financial stability and success. Same with our health. We know that we should eat better, exercise, surround ourselves with positive people, entertain healthy and positive thoughts, etc, but we don't always do these things. If we did, it would save us a lot of stress, promote a healthy lifestyle. We would be happier, save money from some medical expenses, and have more time for ourselves and those important to us. You want to reduce your stress? Reduced your spending.
Picture a hose with water running through it. If there are big gaping holes in the hose, then it's easy to see water gushing and we can apply a patch to those areas. However, did you know that a similar hose with multiple needle-sized holes loses just as much water as the hose with huge holes? Our spending can be like this at times. It's easy to see the big gaps, but it's the small holes that nobody sees that cause the most damage.
If we examine these potential problems early, we would better understand our spending patterns and be able to redirect funds as we so desire. We would then be in a better position to save and invest. You would be surprised how much.
We may not always have an income problem. instead, most likely we have have a spending problem because we may never really look to see where our money goes. There is a saying: "Be faithful in the small things and more will be added to you."
Show diligence with the small amount and you'll be better prepared for when the lump sum comes.
Here are some pointers to help you keep on track and really examine your spending habits and find ways to improve. It will also help you redirect funds to different areas and show where you can save money.
1. Always ask for a receipt.
2. Keep those receipts and track what you're are spending each month.
3. Work with a financial spreadsheet that itemises your income and expenses.
4. Compare prices. Am I paying too much for the same product/service?
5. If you can, try as much to live on the 70:30 rule: Save 10 per cent, invest 10 per cent, donate 10 per cent, and spend 70 per cent
6. Save your money in a place where it is hard to access, for example, a separate bank from your normal branch. Have your savings come directly out of your pay cheque into your separate account
7. If you are going into your own business, make sure to pay yourself and recognise that it takes time to grow the business
8. Identify clear financial goals and develop a system to help get you there.
9. Sacrifices are important so don't be afraid to make them for the right reasons.
10. Real estate is one of the best investments you can make as it's an unavoidable expense. You will always need a place to live and it could also serve as a good source of income.
11. Create a retirement plan.
12. Ask yourself, is this a need or want?
- Laura Butler is a business and career development consultant with Fusion Consulting Jamaica. She serves as a consultant to some of the leading companies in Jamaica and has been a consultant to numerous leaders in the Caribbean and North America. She can be contacted at firstname.lastname@example.org or 469-427-2007