Personal budgeting, saving and investing for noobs
Growing up as a young boy, we were never wealthy. We did not go hungry and made ends meet, but there was rarely any money left for spoils. The idea of having enough money so that you never have to worry about money seemed like a dream that would elude forever. So it is only natural that I would grow up to be a spender when I finally started making my own, decent amount of money.
Listen to 004 | Take control of your finances: A free personal budget that works
I believe that I am one of many individuals, that spends most or even sometimes more than what they earn in a month. When you hear the words, “you are living above your means”, you feel offended, thinking this is the very lifestyle I want to portray to the world - one I’ve earned through hard work, determination and grit. I came from nothing, now look at me!!
There is not quite anything as fun as spending. Being in a shop and seeing something nice, something that you know you could’ve never afforded before, but now you can simply swipe a piece of plastic and have it all to yourself. I cannot tell you how many times I would enter a shopping mall for a specific reason and returning with many expensive things, having forgotten the very item I set out to go and buy.
See, what I needed, was a couple of basic principles around managing money, budgeting, saving and investing. Not, too hard, unachievable and frustrating, just basic strong methods that work. I believe very much in the 80/20 method in many parts of life. With personal finances it was the same for me. Provide me with the 20% principals, that will yield me 80% results. Once I have mastered the 20% principals, I can re-evaluate and decide to learn more.
While the reasons might be obvious, it is important to be able to actually call upon those reasons when asked. They need to be front of mind so as to not veer off’ your goals and always be completely aware of why you are saving.
The hardest part of everything we are discussing here, is discipline and determination. It is not easy to put money away. It is even harder to have money put away and then avoid temptation to buy anything with it. Unfortunately we live in a world of marketing, manipulation and social and peer pressure. Literally everything commercially is designed to appeal to customers and make a sale. Money as earlier described also provides for a certain lifestyle i.e. minimum TV size of x, minimum car of y and house size of z. We are unknowingly pressured by friends, colleagues, family, media marketing etc. to materially increase our quality of life all the time. It is important to understand that this concept exists and that one does not need to be a slave of commercial brainwash. Saving money ensure for a sustainable future where life’s inevitable surprise expenses do not completely derail your life.
Apart from the immediate benefits, savings also provides for long-term security. If you are reading this and are similar to me, a few years back, I struggled with the thought of putting money away for one day when I am old. Why should I live like this now, so that I can be rich when I do not need or have the ability to really enjoy the money? The problem is that when you retire, you obviously seize to earn an income. Also, your dollar today, won’t go as far in 20-30 years from now, so it is imperative that you not only save some money, but actually get some financial advice to assist you in estimating future values of your savings with inflation and so on. At the end of the day, you can either decide to be comfortable when you retire, with too much money that you children can inherit one day, or, save too little and become a burden and bad example to those very children.
There are many other obvious reasons for saving such as being able to freely pursue your dream career when you have enough saved up to absorb the potential of financial loss during such change. You can save up for fun, leisure, travel, a boat, car or house. All of which are much better purchased with cash than borrowing from a bank and paying interest.
Lastly, it is important to remember that borrowing costs money while saving earns money. So the more you save, the more the bank will reward you with sweet, sweet interest on those savings. This will allow for some passive income and your nest-egg to keep growing even while you sleep. Nothing quite beats this feeling, the joy and stress relief it provides.
Pay yourself first
"Pay yourself first" is an investor mentality and phrase popular in personal finance and retirement-planning. It refers to automatically routing a specified savings contribution from each pay check at the time it is received. When doing this you are essentially paying yourself some savings first, money that is yours to grow, nurture and invest, prior to paying your monthly living expenses and making other purchases. Now, obviously you require a strong budget with all your expenses listed out as accurately as possible. This allows you to know the net amount left over to spend after all debit orders and necessities have been paid. Make sure to set up an auto-payment or debit order structure to automatically take your pre-defined amount of savings from that amount and put it away.
Once this is done, you will have an exact amount of spending left that needs to carry you through the month.
The hardest part of everything we are discussing here, is discipline and determination. It is not easy to put money away. It is even harder to have money put away and then avoid temptation to buy anything with it. Unfortunately we live in a world of marketing, manipulation and social and peer pressure. Literally everything commercially is designed to appeal to customers and make a sale. Money as earlier described also provides for a certain lifestyle i.e. minimum TV size of x, minimum car of y and house size of z. We are unknowingly pressured by friends, colleagues, family, media marketing etc. to materially increase our quality of life all the time. It is important to understand that this concept exists and that one does not need to be a slave of commercial brainwash. Saving money ensure for a sustainable future where life’s inevitable surprize expenses do not completely derail your life.
We are unknowingly pressured by friends, colleagues, family, media marketing etc. to materially increase our quality of life all the time.
Once you have made a decision to start saving, decide on a percentage of earnings that will go into saving and stick to it. Doing this makes the entire endeavor more intentional, leaving no room for compromise, change or distractions. Choosing a percentage also means that as your income increases, so should your amount of savings.
Set up a long term and short term savings account
Typically you will use long-term savings to pay for university for your kids, retirement, or buying a house for example. Large expenses, further along in the future, usually with a date of expected spend. You put money into your long term savings that you do not intend on using in the near future.
A long-term savings account will also allow you to take advantage of the concept of compound interest. This is the concept of earning interest every month, increasing the amount of savings. Your next interest earned will then be calculated on this new, larger amount of savings. Which means that when your savings increases with earned interest, so will your earn-able interest increase proportionate to the savings amount.
Setting up a short term savings account would typically act as a funnel to you long-term savings account. This is where the savings that you paid yourself first with, would go. Money in here can be accessed instantly, should emergency funds be needed. Interest rates in short term savings accounts are not usually as good as long term as you are essentially earning less, for the luxury of having access to your savings at any time. This means the bank carries more risk of that money not staying in the account long enough for them to reinvest efficiently. This risk comes at the premium of slightly less earn-able interest.
But this does not mean that short terms savings shouldn’t be used, they are perfect as a 3 – 6 month bladder between your current account and long-term savings account. You typically decide on a reasonable amount of short-term, accessible savings you need at all times as a float, and any earnings or savings exceeding this amount then funnels into your long-term savings account.
Try not spend your short term savings – then transfer it to long term
Probably the biggest issue in saving for me personally, is not spending the money in the short-term savings account. It is as if life suddenly shows me all the things I don’t have, but could have. It's as if every advertisement of something I want, becomes something I need. I find myself justifying the expense and inevitably eating into my savings to fulfil my desire for the item. Usually the dopamine hit of getting something new wears off in a day or two and I find myself in the full swing of buyers remorse and disappointed in my lack of self-discipline.
How to stop spending
It is a good idea to take some time and think of the purchase. “Sleep on it” as some would say. I find that when I do this, I start rationalizing the reasons to have the item and equally so the reasons why I don’t need it. It seems that when you perform the pros vs. cons list in your mind, the con’s always win. Your conscious will do the rest letting you feel a bit of the buyer’s remorse that will follow the purchase.
You should also go and work out how much money you earn in a minute, hour, day and week. Once you can see the amount of blood, sweat and tears that goes into the purchase, you will become a lot more protective of your savings.
Leave your credit cards and other shopping accounts at home. This is as good as “sleeping on it”. It allows you some time and effort required to revisit the store to make the purchase. Hopefully your pros and cons can be done by that time and you have come to the conclusion that you will not buy the item. Also, divide your net available spending into 4 weeks, transferring each weekly amount into your transactional account per week. When you swipe this card you will see the available balance across a shorter period, which is much more manageable and less tempting than seeing the available balance than for the entire month.
Something that works for me, is just to simply quit shopping altogether. This counts for the online daily deals of your favourite marketplaces, or going to shopping centres that has so much variety. See it is quite simple, if you go online shopping or to the mall with no intention of buying, the sheer variety will get you to hook onto something eventually. Don’t shop, unless intentionally going out to buy something.
Lastly, I also try to sell something unnecessary, every time I do falter and buy something that I don’t need. You can use this money to pay for the new item and also reduce your overall carbon footprint and waste.
Once you have perfected the art of personal budgeting, short term and long term savings, it is time to think about investing your money. The idea of investing is to find a way to accelerate the growth of your money and maximizing returns. The whole idea of investing is to try and outpace the rate of inflation and actually increase the value of the money you have invested.
There is much more growth potential in investing your money due to the power of compounding and the risk-return trade-off.
Compounding essentially occurs when your investment generates earnings also known as dividends, which can then be reinvested to grow your portfolio. These earnings then start to generate their own earnings which is the power of compounding. Essentially your investments generate earnings from previous earnings.
Taking risk into consideration plays a large role in maximizing your return. A rule of thumb is that safe investments such as money market accounts, offer very low return due to the low risk carried. High return investments usually are more volatile carrying more risk, but the potential to have much larger returns.
Deciding to start investing can be a daunting task and we recommend you not embark solo into it. Get a friend or family member to refer a trusted financial advisor to assist you in investing your money and pick up a few books to read up about it.
As always, avoid the temptation of get rich quick schemes, pyramid schemes and other scams, if it sounds too good to be true, chances are it is.