5 tips to achieve financial security

1. Create a financial calendar

Financial calendars are usually associated with companies, but you can also benefit from your own financial calendar as an individual. While the best time to have created a financial calendar was at the beginning of the year, the next best time is now. A financial calendar is map of income and expenses, forecasting where you expect everything to go every month. It is a great planning tool to help you budget every month, and at the end of the year, you will be able to use it to review exactly where your money goes and adjust accordingly. You can create a calendar for yourself by downloading a template from www.dollarbird.com or use an app like Fudget or Mint to track your budget.

2. Buying a car? Think of the 20/4/10 rule

A car’s value tends to begin to depreciate almost immediately you buy it, so it’s best to pay cash for one to reduce your financial exposure.

However, if you must borrow, use the 20/4/10 rule: put down a deposit of at least 20 per cent of the value of the car, finance the car for no more than four years, and don’t commit more than 10 per cent of your income towards loan payments.

This helps stop you from buying a car you can’t afford and helps to calculate how much you’re spending on your car repayments, fuel and insurance, which depends on the vehicle and type of cover you get.

Debating whether to buy used or new? Keep in mind the 10-year rule. Plan to use the car for the next 10 years regardless of whether it’s new or old.

3. Debt could be a good or a bad thing…

One of the biggest hindrances to saving for your future is debt. When you have to direct a chunk of your income towards clearing debt, you might have very little or nothing left to put in your savings account. To be able to comfortably pay yourself every month, you should figure out the best strategy to clear your debts. However, don’t prioritise debt over savings – this strategy can backfire on you and leave you in even more debt. Instead, figure out what portion of your income you can save while also paying down your debts.

Consider using the snowball method to pay debts. With this strategy, you list all your debts – from smallest to largest. Ignore interest rates and throw everything you can at the smallest debt. Meanwhile, you can make minimum payments on the big debts which are accruing interest. Once you’ve paid off the smallest debt, move on to the next one and the next one.

Before you know it, you will be directing all the funds you were using on the smaller debts to clear just one big debt. And soon enough, you’ll be debt free. After paying off your debts, you can direct all that money into paying yourself.

4. Realise that real estate will not always appreciate

Most of the time, investing in real estate is a good idea, but buying into the myth that it will always appreciate will leave you disappointed. A little investigation into the state of real estate in several markets in the country and abroad will show you that this is not true. Just last year, Kenyan real estate investors experienced losses as values in the property market fell by more than six per cent. “The price of the prime residential property fell by 1.8 per cent in the first half of this year, increasing the annualised decline to 6.7 per cent in the year to June,” said property consultancy firm Knight Frank in its market report last year. The growth rate is now at a five-year low, with some developers having dropped prices by as much as 30 per cent. Experts have been warning of an impending collapse of the property market in Kenya for a while. So it would be wise to do a lot of homework before you invest your hard-earned money in it.

5. How much is enough for an emergency fund?

Financial experts say that your emergency fund should have an amount equivalent to three to six times your monthly expenses. When tallying up your monthly expenses, remember to include expenses such as rent, utilities and insurance premiums.

But for many people, saving even three months’ worth of expenses can seem like an unattainable goal, especially if you are also working on other financial goals such as saving for retirement or paying debts. To start off, you can aim at saving a month’s worth of expenses. Then you can make a long-term goal to work this up to three months’ worth of savings.

If you have an unstable job, you might have to save more during the months when you have steady income. This will help you have an easier time during the periods you have less reliable income.

You should also consider other factors such as family size, number of earners in the family, and the health of self and other family members. For instance, if you have older people in the family or very young children, you might have to save more in case of health-related expenses that are not covered by your health insurance.

hustle@standardmedia.co.ke