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Three common misconceptions keeping you poor

SUNDAY MAGAZINE
By Pauline Muindi | May 10th 2020

Money is a central factor in our daily lives. It is used to compensate you for labour, determines your lifestyle and plays a major role in the quality of life you’re able to enjoy. But despite it being such a big part of our lives, most of us have big misconceptions about money. Such misconceptions can keep you from making smart financial decisions.

Here are some of the most common financial misconceptions you need to ditch:

A good salary means financial security

If only you had double your current salary, you’d be able to save, invest and retire early! Although this seems to make perfect sense, the truth is that you might still experience difficulty paying bills even with a better salary.

As your income increases, it is common to want a better lifestyle. You might move into a bigger apartment in a better neighbourhood, upgrade your car and take your children to a more expensive school in the new neighbourhood.

You adjust your lifestyle to fit your new income bracket, something known as the lifestyle creep or lifestyle inflation. You might find yourself with little or no savings, deep in debt, no notable long term investments and no retirement savings even though you are bringing home a higher salary.

Even if you’re earning a high salary, you still need a solid financial plan to  help you achieve both short-term and long-term financial goals. You have to create a financial plan to help you with goals such as paying off debt, saving for retirement, and building an investment portfolio.

Don’t forget to have six months’ worth of expenses saved away in an emergency fund. This money comes in handy in case you lose your job or are unable to work for some reason.

When you start earning a higher salary, don’t make drastic changes in your lifestyle. Instead, go for gradual changes over time and always stay within your budget. To make sure that lifestyle inflation doesn’t eat into your financial gains, it is wise to have a specific percentage of your income set aside for savings and investments at all times.

I’m too young to think about retirement

Saving for retirement is the last thing most people in their 20s want to think about. But the sooner you start saving for retirement, the better your financial future. If you start a retirement fund when you get your first job, think of all the compound interest you will earn by the time you retire!

Many young people rationalise putting off retirement saving by thinking that they will start when they get a job with a higher salary. They overlook the fact that their responsibilities will probably grow over time, which might affect their ability to save for retirement.

Studies show that millennials might not be able to retire till age 70. This is because millennials are building wealth at a much slower pace than older generations. They had the misfortune of entering the labour market a tough economic time, and they have more difficulty finding stable jobs with retirement benefits.

But retirement, even early retirement, is still possible for today’s young adults. Figure out what retirement means to you – does it mean working part-time or not working at all? Does it mean living upcountry or in the city? Does it include travelling the world? Having a clear picture of the lifestyle you want to have in retirement will help you figure out how much you need to save.

Experts recommend that you save 10 to 15 per cent of your income for retirement, starting in your 20s. But that is just a general guideline. To figure out how much you should save, think of how much you will spend in a year during retirement and account for about 30 years post-retirement.

For instance, if you will need Sh500,000 per year when retired, you should have at least 15 million shillings in your retirement fund. Remember to account for inflation, which can significantly erode your buying power.

Having a number in mind will help you figure out how much you need to put away each month and motivate you to achieve the goal.

Budgets don’t work

Another misconception that many people have is that budgets take too much work to create, while not helping in improving the financial situation. Nothing could be further from the truth.

A budget is like a diet, you actually have to stick to it in the long term to see results. You need to have the right mindset and to put in the effort to make budgeting work for you.

Give your budget several months as you adjust to the changes. In the first few months, you are likely to go over-budget because of underestimating your expenses. Don’t give up. Instead keep on tweaking your budget until it suits your purposes.

Don’t make the mistake of crash-budgeting. This is where, much like a crash diet where you aren’t getting important nutrition, you cut out key expenses in the hopes of saving money. For instance, you might cut out entertainment or buying new clothes.

This strategy is bound to backfire as you become unhappy and resentful about having to deny yourself such pleasures. Just like crash dieting often leads to binge eating, crash budgeting can lead to binge spending. Therefore, keep your budget flexible and allow for some fun expenses.

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