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Personal Finance

Dealing with cycle of financial distress after festive spending

Budgets
Budgets are effective cash management tools that assist us in analysing our income and expenditures. FILE PHOTO | NMG 

The festive season has traditionally left some people in anguish having broken the bank to make merry.

The financial distress that follows is often heavy but many keep falling in the same trap.

“The adage ‘know thyself’ carries weight to date. In finances, financial self-knowledge is very important because through that you get a clear picture of what your assets and liabilities are after which, you then understand which of your assets are financial and which ones are non-financial,” explains Ken Gichinga, chief economist at Mentoria Consulting.

When it comes to personal finance, wisdom dictates that you start from the known to the unknown while being brutally honest with yourself about your actual not imagined financial position. It helps us half solve the ‘I am broke and shall now only eat ugali and cabbage in January after eating nyama choma all December’ equation.

For starters, understanding your financial position is essential. You must understand the basics such as that you make X amount of money, you spend Y, and you try to make sure that your Y is less than the X. Turns out math teachers were onto something when they tasked us with finding the elusive X for years. The first place to get started is by writing down your financial goals with specific timelines and targets for each month. This allows you leeway to put aside some money for enjoyment as Mr Gichinga advises. According to him, being specific with where your money goes when it comes in is pivotal for planning purposes.

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"Naturally, how you choose to manage, spend, and invest your money has a profound impact on your life, yet very few schools teach took the time to teach this important skill. Becoming financially savvy takes a while but for the disciplined financial management is achievable. You need to be in the driver's seat," says Mr Gichinga.

The good news is that the basics are fairly simple and static, this being the beginning of the year, there is more than enough time to run around your financial situation to ensure that you will be enjoying the warm tropical beaches along the coast come December.

Mr Gichinga opines that one of the key underlying problems, the biggest elephant in the room, is people’s ability to deceive even themselves by living for the applause of their peers driven by peer pressure and the social acceptance that comes with earning more.

Big fan of eating out? If perhaps you are buying a coffee or vanilla latte every day, as delicious as they are, means that weekly, you part with about Sh1,000. Multiply that figure by the average number of working days in a year, which is 252, and you will find that you spend about Sh25,200 on coffee.

“You need to interrogate the usefulness of memberships, subscriptions and other overly luxuriant features that you are paying for but could live without,” says Mr Gichinga.

Maybe, just maybe, 2020 is the year you should finally consider eating from home to save on expenses and brewing your blend of homemade coffee. Remember, the idea is to learn how to manage your finances better by taking everything and every penny into account.

“It is not easy to keep track of all expenses given the changing costs of living, now more than ever, as people complain about high expenditure. It is important to find innovative ways to adapt to the economic times. For example, someone who used to take a matatu to the town can decide to have a video conference for 20 minutes instead. This is the reality of the impact technology has affected how we live and work by saving on time which is the most valuable asset. This allows individuals to successfully invest their time elsewhere,” said Mr Gichinga.

Growing up you most likely learnt some basic math.

As a result, too many adult Kenyans find themselves grossly unprepared and illiterate on money matters. A majority of us never learnt basic money management such as creating a personal financial statement, a budget, sound investing and saving for a rainy day as well as a debt elimination plan.

On these key tools, Andrew Karanja, Lead Economist at Kingdom Consulting, says: “A personal financial statement outlines all the assets owned by a person as well as any monies owed to creditors, banks or lenders. In terms of format, a personal financial statement is very similar to a company's balance sheet. As a result, too many adult Kenyans find themselves grossly unprepared and illiterate on money matters,"

A majority of us never learnt basic money management such as creating a personal financial statement, a budget, sound investing and saving for a rainy day as well as a debt elimination plans balance sheet. Individuals can then use the information gathered to assess their actual net worth, while highlighting exactly how much debt they owe other people. However, finances are as much about math and numbers as much about psychology, habits, and the values you choose to live by. Simply, your mindset is just as vital as the math explains Mr Karanja.

As lending became easier, a large number of Kenyans are in debt and owe money on assets owned such as homes, cars and properties.

"The monetary value of such personal assets that contribute to debts owed may be ascertained by deducting pending arrears over these items from their current market value. The difference indicates the net worth of all the major assets you own," explains Mr Karanja.

A wildly popular technique in personal financial management is the debt snowball method.

Mr Karanja an advocate for this debt elimination technique suggests that you should list all debts owed to creditors and other lenders in order, starting from the smallest and least significant debt to the largest prioritised debt. The technique gives you a sound and workable plan for debt repayment in a logical manner.

The next step is coming up with a budget outline. In creating a budget, it is important to first list your income as well as all other monies received from other cash-generating assets. Next step is itemising your expenditures for a specific period.

“Budgets are effective cash management tools that assist us in analysing our income and expenditures. Understanding where and how cash is pivotal to personal financial management. Once a budget is created it is upon the individual to practice self-discipline by carefully following the spending plan which allows you to focus on repaying debts,” says Mr Karanja.

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