Managing personal finances is key to successful investing


Successful investing is about managing risks and waiting patiently for your investments to yield fruit. However, before you pump your money into a venture, you need the right information on markets where you are investing and the right discipline to build the same.

Managing your finances professionally is critical to enabling you to meet your investing goals with little sweat.

When your income is salary based, it is natural to use that money to meet your needs and wants. Whatever remains after is either saved or invested.

In modern personal finance, individuals know that they need to save for retirement and grow those savings by investing them over a duration of time. Based on this, it has become common to classify savings and investments as needs just like food, housing and transport.

To optimise money set aside for emergencies and investments, you may be forced to sacrifice some wants and cut down on spending on needs. This may mean taking a closer look at your spending habits. Some products that you classify as needs may actually be wants.

Cutting on needs may include moving to a less expensive estate, bargaining for a cheaper internet connection, shopping for a cheaper health insurance package, getting out of debt to reduce interest payments, carrying home-cooked food, and doing repairs yourself during free time. While cutting expenditure on needs you should take care not to lower your quality of life or raise dissatisfaction levels.

Managing your expenditure on wants is tough because they tend to give you greater satisfaction when honoured compared to needs. The satisfaction from a packet of flour consumed is not the same as a weekend spent at a posh hotel in Diani at the Coast.

You can use several techniques to control spending on wants. First, living on a budget is key to lowering your expenditure on wants. Generation Z has come up with apps for budgeting that use the envelope system.

The idea is to separate your wants budget in envelopes such as travel and children’s activities. If one envelope is depleted, you don’t spend any more money on it.

Second, you can cut on your wants by delayed gratification. This implies setting a time limit before making a purchase. For instance, you can set a limit of Sh10,000 where you would have to think about it for say 24 hours before spending it.

This way, if you need to spend on a product that costs Sh50,000, you will have to think about it for at least five days. This would help control impulse purchases.

Another technique may include setting no-spend days. On such occasions, you strictly don’t use money unless in an emergency. This will help build the necessary discipline to manage your personal finances and increase the cash you retain as an emergency fund and investments.

Lastly, be open about personal finances and discuss them with your spouse and friends. You will be amazed how much other people know about personal finance and how much they are willing to share.

Savings lying idle tend to lose value over time due to inflation. Once you have optimised your budget and created a stream of funds towards your investment, you may need to start an emergency fund to cater for unwelcome events such as income loss or accidents. It is common practice to build your emergency fund to the size of your six month’s income.

The money that you save should then go to boost your investments. You can decide to actively invest in your business or skill or you can decide to go for passive investments.

Passive investment involves ventures that require little or no contribution from your daily activity. These include investment vehicles such as rental income, buying stocks, buying exchange traded funds (ETFs), and cryptocurrencies.

Modern investing is easier and app-based. It also doesn’t require a huge sum to start. For instance, traditional investing in real estate would require you to buy a piece of land and develop.

Modern investing in real estate is as simple as signing up with a locally regulated broker, downloading their trading app, and buying shares of a real estate company.

You can begin building your investment portfolio with as little as Sh10,000.

The money you invest today will probably be worth a lot more in 10- or 20-years’ time. It is prudent to note that all investments carry some form of risk. The biggest mistake that people make in investment is starting late. Start early and stay true to your investing goals.

Rufas Kamau, is a research & markets analyst at Scope Markets Kenya. Email [email protected]