Why you're broke this January, how to be financially stable

Why you're broke this January, how to be financially stable

Over the last few weeks, Kenyans have been cracking jokes on social media about the dreaded 'Njaanuary' drought. From memes about 'broken calculators' to playbooks on how to dodge the landlord, the inter-webs are teeming with jokes about the dreaded 90-day month.

Hidden behind the humorous smokescreen is uncomfortable, yet familiar truth: Kenyans are struggling to make ends meet this month – just like they did in previous years.

So why do we find ourselves cash-strapped every January? Did we overspend again over the holidays? Is the financial crunch just part of our economic cycle?

Financial Literacy Coach Patrick Wameyo argues that this trend is often an indicator of imprudent financial habits – habits that he says have far-reaching implications.

Drawing lessons from his 19-year banking career and financial literacy consultancy, Wameyo says these eight habits often land people in tough financial situations:

1.  Not having clear goals

Our life goals and personal values dictate how we spend our time and money. Often, those who are not working toward a specific life goal misuse money on unnecessary expenses.

"Clear goals give you priorities which are aligned with your values. Those who do not set clear goals live life expecting the things they want to magically appear out of nowhere," he said.

This habit often leads to overspending because 'idle money' is always available.  

2.  Spending 100% of your income

Do you spend 100% of your income each month? If your answer is yes, you should know that you are guilty of committing a cardinal financial sin.

"This second point is very important. If you do this, you are always 30 days away from poverty," Wameyo warns, noting that this habit affects people of all income brackets.

To get off the highway to poverty, adopt Harvard bankruptcy expert Elizabeth Warren's 50/30/20 rule. Limit your needs (food, shelter, basic utilities) to 50% of your post-tax income.

Next, spend a maximum of 30% on your wants. This could be simple niceties like spending an extra Ksh.100 for a nice haircut, to buying 1GB of bundles or even something more significant like a new car.

Finally, a minimum of 20% of your income should go to savings and debt repayment. If you want to get out of debt or stretch your shillings further, reduce the cap on the other two allocations.

3.  Eating into savings

"Some people make savings, but before the month is over, they find that they have somehow used some of that money. Essentially, they are just postponing consumption," Wameyo explains.

If you find yourself falling into this trap, you should try making your savings inconvenient to access. Disabling mobile banking or setting withdrawal restrictions on your on your savings account could help you keep your kitty intact.

4.  Ignoring insurance cover

Life, health and education insurance may seem inconvenient at first, but such policies eventually pay off. Such policies help you set aside money for important things, and they can keep you from knocking on a shylock's door when the unexpected happens.

"It is very important, especially for young people who don't have many commitments. [They should use these policies] to set aside money and achieve a long-term goal without the stretching their pockets," Wameyo advises.

5.  Misuse of credit cards

"When a person spends their money imprudently…. the next step is often acquisition of a credit card. Because some people don't know how to manage credit cards, they rack up massive debt," he explained.

"Often they will only pay 10-20% of their bill and the remaining 80% is carried on as debt throughout their lives," he said, adding: "...credit cards are very expensive and this does mess your cash-flow substantially."

6.  Not saving for "emergencies"

Do you have an emergency fund? Can it keep you afloat for six months if you lose your income? If your answer is no, then you need to add this to your 2018 resolutions.

Failing to save for unforeseen events like deaths in the family or accidents could have you pestering friends and colleagues for "soft loans". While borrowing from friends for emergencies might be embarrassing, a bank loan can come with more complications, Wameyo warns.  

"An interest-earning loan from a bank could be even worse. Failure to pay this loan on time means that at the end of the month you have to pay a higher amount by way of penalty interest, therefore, reducing your income."

7.  Living for others

Living to impress others could have you paying hefty amounts to wear trendy clothes, live in posh neighbourhoods, and drive luxury cars – all so that you can fit in.

Wameyo points out that some people make the same financial mistake in pursuit of seemingly noble causes: "There are people who will give 90% of their income to a church. When the remaining 10% fails to cater for their needs, they begin to borrow."

8.  Waiting for the 'right salary' to invest

Most young people put off investments, thinking they will consider it when they make more money. A few years of experience will teach them that one never has "enough" money to invest.

"[By putting off investments] they are losing a key element called time. Investments require a little bit of money over an extended period of time. Eventually, you will have a sizable investment."

Even a few hundred shillings tucked away monthly can be a start.