Personal Finance 101 with MissChindiya

By Michelina ‘Mikey’ Chindiya

1. How can I start managing my money better? 

Well first things first, in order to manage money better you need to have a positive relationship with it. When we think of relationships, we often think of our interactions with other people and these relationships can be healthy or toxic based on a number of factors and our relationship with money is exactly the same. Having a good relationship with money is important because financial wellness is an important part of your overall well-being, it entails having a healthy relationship with money that makes you feel satisfied and not overly stressed out and essentially leads to you managing it better. You build and maintain a healthy relationship with money through your behaviour. To be honest, I did not have a healthy relationship with money and kept treating it as a goal; but in reality, money itself is not the goal – it is a tool you can use to help you achieve your goals (pay for college, see the world and travel more, starting a dream business and. This new way of thinking will help you resist impulse spending and help you take control of your finances and be more intentional about the way you spend, use and manage your money.

2. Is a budget necessary and what are the steps to building a budget? 

 A budget is a plan for every dollar you have and yes it is important because creating a budget can help you feel more in control of your finances and allow you to save money for your goals. The trick is to figure out a way to track your finances that works for you. It’s not magic, but it represents more financial freedom and a life with much less stress. Here’s how to set one up:

  1. Set Realistic Goals – Goals for your money will help you make smart spending choices. Ask yourself: What do I want my finances to look like in one year? Decide what is important to you and start there.
  2. Identify your Income (AFTER Tax) and Expenses (your surplus basically) – You probably know how much you earn each month – but do you also know where it all goes? Find out by tracking what you are spending. Spend as you normally would, but for a few weeks, write down every cent you spend or you can use an app. It is easy and you might be amazed by what you find out (patterns, trends, behaviors)
  3. Separate Needs and Wants – Ask yourself: Do I want this or do I need it? Will spending this money get me closer to my financial goals or further away? Can I live without it? Set clear priorities for yourself and the decisions become easier to make. Separating wants from needs can be difficult and examples of common wants include dinners out, gifts, entertainment and travel. 
  4. Design Your Budget – Make sure that you are not spending more than you make, balance your budget to accommodate everything you have to pay for.
  5. Creating a budget entails: 
  • i. Understanding the budgeting process
  • ii. Allow up to 50% of your income for needs
  • iii. Leave 20% of your income for wants
  • iv. Commit 30% of your income to savings and debt repayment
  • v. I recommend the 50/30/20 budget. In it, you spend roughly 50% of your after-tax income on necessities, no more than 20% on wants, and at least 30% (convert this amount to USD and save in hard currency) on savings (putting it towards an emergency fund) and debt repayment (if you have any).

In conclusion, a budget is essential, it is not about how much you make, but about what you do with what you have and proper budgeting over the long term will allow you to have manageable debt, room to indulge occasionally, and savings to pay irregular or unexpected expenses and retire comfortably.  

3. How do I balance my budget with self-reward?

At the end of the day, joy is important. Engaging in activities that bring you joy, like taking a walk, reading or taking an exercise class, helps you recharge your emotional well-being. The same thing applies with money, small purchases that bring you great joy, like buying a good book, or an occasional gourmet meal, or buying your child a special treat, is money well spent. Set aside money in your budget for those things that bring you joy; it is needed once in a while; just make sure you plan for it.

4. How do I begin to plan for my retirement?

Retirement is a process that has many steps and evolves over time. To have a comfortable, secure and enjoyable retirement, you need to build the financial cushion that will fund it all and this requires planning and here’s how:

Firstly, start planning for retirement as soon as possible so that you can take advantage of the power of compounding (compound interest).

Secondly, now your retirement needs by thinking about the kind of lifestyle you would like to live in your retirement and how much money you would need to afford that lifestyle.

Thirdly, think about your retirement goals and how long you have to meet them, the time horizon and ask questions like, “When would I like to retire or at least slow down in life?”

Fourth, you need to look at the types of retirement accounts that can help you raise the money to fund your future. I advise you to save money into a structure that enables your money to grow as you contribute to the retirement fund on a monthly basis over a certain time horizon. Make sure to do a risk tolerance assessment prior to setting up a retirement investment structure so that you select the appropriate investment.

Then, start saving, keep saving and stick to it. DO NOT TOUCH your retirement savings.

5. How do I balance retirement savings with my children’s college funds? 

The timing of retirement and college may cause parents to feel as though they must choose between the two goals that are arguably the most sizeable and emotionally significant goals in our lives, that often arrive around the same time.  These days with the average age at which most couples have children results in a lot of children going to university around about the time their parents are nearing retirement. As a result, parents might feel they have to choose between saving for retirement and paying for university. Fortunately, it does not have to be a scenario where you have to choose between the two, as you can take steps to potentially achieve both goals. 

You can start off by saving more than you think you may need for retirement. Later in life, you could consider reducing your savings rate to allocate more money for university.

Save money for retirement AND education simultaneously but make retirement the main priority because parents must help themselves before they can help their children because wanting to help pay for college can jeopardize their own financial well-being. As a parent, you need to be in a position of financial independence or have a solid plan in place before assisting your children.  For example, if clients use funds they had set aside for retirement to help pay for their children’s college expenses today, they may not be in a position to help their children with a future home purchase, a wedding, or raising grandchildren. They may very well become dependent on their children in the future for financial support.

You need to remember that you can borrow for college, but not for retirement. The majority of parents sometimes want to use funds they have already accumulated and set aside for retirement for their children’s university expenses yet there are various financing options available to parents and students to pay for university, in addition, the financing options for higher education are abundant and easily accessible, whilst options for financing retirement expenses are more limited. Those in retirement cannot benefit from the same variety of loan and financing options as students, due to their age and limited earning potential. 

I also advise married couples to save for college before children enter the picture through various regular savings plans on the market. When they have a child, they can then name that child as the beneficiary of the investment. Some people may be in a better position to set aside a substantial sum of money for college before they have children.

6. What percentage of my income should I put in an emergency fund? What is an emergency fund?  

An emergency fund is designed to cover a financial shortfall when an unexpected expense crops up and it can serve as a place to get the money you need when you find yourself short and prevents you from getting into debt in order to meet these financial shortfalls. Since it must be reliable, it needs to hold guaranteed savings. In other words, savings accounts are good for emergency funds, when they hold three to six months worth of salary and I recommend you put away 20-30% of your surplus into your emergency savings pot on a monthly basis.

7. What are the different types of investments?

There are so many financial instruments that one can invest in, I will give a few as examples: 

  • (a) Stocks (shares of ownership in a company, they represent equity interest in a company) and Bonds (these are fixed income instruments). Stocks and bonds are also known as securities.
  • (b) Mutual Funds (a professionally managed investment that consists of funds pulled from various investors to create a portfolio, as an investor you can buy shares in a mutual fund these are very popular in Zimbabwe) and Exchange Traded Fund (an investment fund traded on a stock exchange)
  • (c) Property – property makes a good investment because of capital appreciation, it almost always appreciates in value mainly because of the fact that there is a finite amount of land available to an increasing global population, hence the demand for it is constantly on the rise which pushes its price up as time goes.
  • (d) Retirement plans
  • (e) Education funds

These are just a few, and selecting an investment product can only be done once you have a comprehensive understanding of your current circumstances, your needs and goals as well as your risk tolerance.

8. What assets can I purchase to grow my wealth? 

Property/land (appreciates in value), equipment, for example, mining equipment that is used to generate US dollar returns (hard currency), stock/equities.

9. If I am a small-medium business owner how best should I save my funds?

  • (a) Find low-cost alternatives to advertising your product rather than sticking to traditional advertising methods, which can be very costly.
  • (b) Barter trade with other service providers and get sponsors for events, launches and marketing which can help you save your own business revenue and re-invest your savings back into the business.
  • (c) Continuously do your best to negotiate optimum prices with the wholesalers whom you source from.

10. What techniques can I use to avoid overspending?

First things first create a budget.

A budget will help you take inventory of your spending and allow you to keep track of where your money goes. Daily tracking of our expenditures helps us see where our money is going, so we can make the appropriate changes.  Some helpful phone applications can help you track your expenditures and even help identify certain spending patterns and habits over time.

Secondly, cut down where you can.

  • (a) Reduce spending on food and entertainment, it is ok to say no to invitations to going out when you know that you cannot afford to.
  • (b) Reduce monthly bills by reviewing your memberships and online subscriptions, there are times you will find yourself making subscription payments for products or services that you do not even use or need. You can reduce monthly bills by keeping tabs on your water and electricity usage; make a conscious effort to cut down on consumption in the home.
  • (c) Do your monthly grocery shop with a list and do not deviate from that list. Sticking to a shopping list will help you avoid “impulse” purchases of the things you may not really need. It saves you time in the shop and it saves you money in the bank. 

Thirdly, know what triggers impulse spending.

Understanding your spending habits will help you figure out what spending triggers you might have, look at your transactions for the past 3 months, and identify when you spend the most or make purchases that you now realize you might not have needed? Try learning from your review and making note of habits that jump out at you and ensure you do your best to avoid the same behaviour in the future.  The next time you will find yourself making a conscious effort to put your money away before spending it. For example, if you find yourself feeling hungry before a grocery shop, hold off on it and do it once you have eaten. Feeling a bit sad or low, try and avoid emotional spending on luxury items in an attempt to fill the void. You need to be strong mentally because entire economies are designed around spending triggers and targeting our weaknesses when it comes to these habits.

11. If I need help with managing my funds which professionals should I approach? 

You can approach a brokerage/financial advisory firm, there is actually a list of investment advisors currently licensed by the Securities and Exchange Commission of Zimbabwe, you can choose from any one of those.

12.Are there any benefits to keeping my money in the bank instead of at home? 

Well firstly, banks provide security and safety against things such as theft/fires. Secondly, banks offer convenience of transacting even though this can also be a problem as it can lead to reckless spending. Having a bank account also helps you keep track of your transactions, which can be of value when setting up a budget and identifying areas of weakness. However, with interest rates low or almost non-existent in Zimbabwe it is unwise to keep a large sum of money in savings accounts, because if we factor in inflation, one is actually earning negative returns. This is why I recommend individuals to keep minimum cash in savings accounts and put the rest in better alternatives such as investments that will help put their money to work and achieve inflation-beating returns.

Images by Mikey Chindiya

Originally published in the 4th Ndeipi Newsletter

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