Now is the time to take personal financial stock
By Anthony Ngatia
Ordinarily, year-end is synonymous with festivities galore. A goat for merry here, a party there, travelling upcountry, buying gifts and the like are a must high-rank agenda items for most people. It is also a time for businesses to take stock of their whole year’s operations.
However, on personal front, few care to take a keener look at the most important aspect of their lives, personal finance audit. They end up with skewed financial priorities and investments.
Taking financial stock, otherwise known as financial audit, is a way to keep us on track when it comes to our financial habits and lives. And even if, like most people, you fall by the wayside to observe your financial plan, personal finance experts say cheer up, as even having an illusion that you are spending your money as planned is crucial in the whole business of personal financial planning.
It is a crucial exercise that everyone should perform each year in order to get priorities right in the short term and the long term. With financial stock taking, reflect back and see if you have been overspending, faithful to your financial plan, or somewhere, you veered off the radar of financial planning and engaged auto pilot gear with your finances.
And as we have seen from the recent financial challenges that have buffeted us, it is quite possible to veer off the defined path to financial freedom once we encounter unforeseen tempests in forms of inflation, price spikes, and wobbling national economic fortunes.
This is notwithstanding the fact that crucial life milestones must progress — education, starting a family, supporting aging parents, owning a home and planning for retirement.
Taking financial stock must be an annual exercise that should anchor and buttress one’s life.
Of course each individual’s priorities are different and the financial practice model to prescribe to one person can markedly differ from another’s hence it becomes quite hard to generalize.
Jafer Tejani, a personal finance advisor says that a 30 year old with children, should establish a formula to allocate income for the whole year. The best way for such a person to distribute income is having 10 per cent saving for retirement, 10 per cent for education planning, three per cent for insurance, of whatever nature, 20 per cent for housing and 47 per cent for living expenses, including fun.
In case you are weighed down by a massive debt, he advises you to ideally spend 20 per cent of your income on debt repayment.
A debt cleared sooner saves one finances that could be wasted in interest on loan, hence freeing some money that could be used in investing or stashed for retirement savings.
If you are in your 40s, he advises that you raise retirement contributions to about 20 per cent of your income. At 50, you need to save 30 per cent in order to retire safely. Of course the concept of compound interest comes to the fore here as, the earlier you start saving the little monthly contribution, the more you reap than a person who starts saving late.
The later may end up saving a greater amount each month yet, by the time of retirement, will not have saved sufficient amount for secure retirement.
If the children are independent at 50s, Jafar suggests that one should distribute their income such that 30 per cent is saved for retirement, 20 per cent for housing, 10 per cent for insurance, 30 per cent for living expenses and fun and 10 per cent for car.
But Lugard Mbwana says it may be difficult for one to strictly follow this kind of income allocation based on mere age categorization as nowadays, life has changed so much that practically, very few sail through life as it ought to be.
"Lifestyle has changed fundamentally and people are starting families late. So the ability to follow the model budget will ultimately depend on an individual," he adds
Following a generic budget would also enable a person to stay on top of their finances.
A typical way of allocating income would, according to Mbwana, be 10 per cent on tithe, 25 per cent on housing, 10 per cent on utilities like electricity and water, 18 per cent on transport, 10 per cent on food, two per cent on clothing, five per cent on medical expenses, two per cent on miscellaneous expenses such as phone and internet, six per cent on savings and four per cent on entertainment.
"There is always a sense of DÈ j‡vu once a person really seizes up the entire picture of their annual income and expenditure. They despair and slip into self-loathing as the annual income appears quite huge yet nothing to show from it," says Mbwana.
"People face several challenges but they tend to overlook them yet they consume their income. These could be: impulsive buying habit, relatives that need support, servicing a long-term loan among other challenges. Lack of priorities and poor financial decisions like entering into a long-term financial contracts, purchasing a high cost luxury item could cause financial heartaches in future," he cautions.
"You need to start differentiating wants and needs so that you do not end up with skewed spending towards wants which may not be really that necessary," he says.
Personal finance experts say that even if one may have blundered the whole year in terms of spending, the best time to start all over again is now. Starting slow but steady by operating on a fixed budget, penny pinching here and there and stamping authority over ones spending plan can work magic.
Financial stock taking can also encompass establishing the nature of predicaments one has faced throughout the year. Personal finance experts say that those who don’t periodically take stock of their personal financial life are liable to make silly money mistakes in future.
And silly goofs are many: taking a loan at 23 per cent to buy a plot that attracts annual appreciation of three per cent, to ditch a job that earns you livelihood for flimsy excuse that it’s beneath you, working hard in multiple jobs then blowing your income in belated ‘self-appreciation cum reward’ orgies or ostentatious displays.
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