Finance at your Fingertips by Moses Ayiku, Jr. MBA OP/ED
The lousiest feeling in the world is that of knowing that you are broke! It impacts your freedom and the guilt trap that comes with it can be quite depressing. If you have an income, there are things one can do to avoid/and/or minimize periods of being broke.
I mention guilt trap because if you have an income and you spend without a plan and become broke, in most cases you would blame yourself for that predicament. Remember, though, we are human, and we will make mistakes. However, when becoming broke becomes a habit, then we need to step up and come to grips with the situation. This week, we will discuss two factors that can help us avoid the broke times: budgeting and banking.
We all need budgets. A budget can and should be quite simple. The reason we need a budget is because it allows us to get a picture of where our money is coming from and where it goes. There are a variety of apps available, some for free that can assist with budgeting. However, before one jumps to an app with its sophisticated and perhaps confusing dashboard, let us start with a pen and paper!
Jim Smith earns $6,000 a month working as an IT Operations Consultant. His bills total about $3,000 a month. In addition, Jim provides freelance support to a business and gets paid $1,000 a month for his services.
The following is Jim’s Budget sheet monthly:
Inflows:
Salary – Consulting 6,000.00
Freelance work 1,000.00
Total Inflows 7,000.00
Outflows: Rent 2,000.00
Utilities 600.00
Food 800.00
Transport 400.00
Entertainment 200.00
Total 3,000.00
Difference 4,000.00
With a net income of $4,000 per month, Jim can set up a savings rate monthly. In his case, Jim is saving for a house of his own so he decides to save 50% of net income every month into a special account. In addition, Jim is building up an Emergency fund. Jim puts $1,500 every month or 37.5% of his net income into his Emergency Fund. With expenses of $3,000 every month, Jim would need to save $18,000.00 to have a 6-month nest egg. By saving $1,500 every month into his Emergency fund, Jim would need 12 months or one year to reach his goal of $18,000. With a nest egg of $18,000, Jim can now plan for other items on his personal list.
Also, imagine the comfort he will have in knowing that even if he loses his job, he can still live on peacefully. Should Jim lose his job, he would have six months to get another job without changing his lifestyle all that much.
We must consider the issue of job loss because it is a possibility of life! This is a reality! Life happens and at times we become unemployed for reasons beyond our control. That emergency fund may come in handy!
Once income is coming in and we are budgeting with a savings and emergency plan in place, we need to monitor all these regularly. Make sure to put pen to paper and write down your budget every single month. There may be changes that one may have to make at times and that can be captured as they occur. Another simple option to prepare the budget is to use an Excel spreadsheet. A key advantage of Excel is that one can put in formulas to automatically add and subtract within the budget.
With a budget in place, it is important to consider your banking situation. If you have a bank account, this should assist you in setting up your budget regularly. Most banks have online apps that provide you with key information about your account. This should assist us in keeping track of our financial situation regularly.
A rule of thumb is to monitor your accounts and assess your budget on a weekly basis at the least. This periodic check will allow you to ensure that all is going as planned with your finances. Any anomalies can be investigated immediately, and you can then take steps to bring your budget and accounts back on track.
Most of us have smart phones and we can take advantage of this by downloading the app that our bank provides. With the app, one can even conduct daily checks to ensure that your bills are being paid on time and all is well with your finances and budget.
Many bills that we incur can now be paid online. It is important to take advantage of online payment options to ensure that your bills are paid and paid on time. Some companies provide discounts for setting up automatic deductions for bills. Phone companies and Insurance companies for example provide such discounts for automatic payments. When possible, take advantage of this and save on your bills with those discounts.
Next week we shall discuss banking and how that can help you to reduce periods of being broke. Please feel free to share with me your questions and experiences on saving. I will do my best to respond, and in some cases, I will write on some of these questions.
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