Money Management
November 11, 2024
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December is a festive month where most people spend much more on indulgence than in other months. Also, the month, being the last month of the year is the perfect time to take stock of what you have accomplished throughout the year so that you can make informed New Year resolutions.
Since December is already here with us, in this article, we shall discuss what you should have done with your money up until now. You can use the contents in the article to evaluate if you allocated your money wisely throughout the year. In addition, you can use the content in this article to inform the resolutions you make for the coming year.
Read Also: Start Saving For Your Year-End Holiday Using These 6 Tips
Hopefully, some of your money this year has paid off your debt.
Debt is a financial instrument that can be transformational if used wisely. Debt is beneficial when the return on investment exceeds the interest rate paid for the debt owed. If the debt owed takes more from your pocket than it brings in, that is a bad debt.
Another way to look at debt is from your budget perspective. Having debt that takes half of your income is not healthy. People have different risk tolerance levels; some can tolerate more strain from debt repayment than others.
A common rule recommended by personal finance experts is the 28/36 rule. The 28/36 rule states that a person or household should spend a maximum of 28% of their gross monthly income on their total housing expense and no more than 36% on total debt service. Financial institutions also use this rule to calculate an individual's debt-to-income ratio to qualify one for a loan.
So before you indulge in your December celebration, it is high time you assess your debt. If you realize you have debt beyond 36% of your gross income, you might have too much debt, and it is high time you start addressing it.
When paying back this debt, you should start with expensive debt. Here are two strategies to pay off your debt, starting with the expensive debt.
Read Also: How to Create a Debt Repayment Plan
The consolidation method is where you go to the lender with the most favourable terms, including a low-interest rate and longer payment duration. You take a big loan that can offset all your other loans. Use the money to pay off all the loans except the big loan you have taken. The big loan, however, is friendly because it has better terms and a longer payback period.
Dedicate your energy to clearing the big loan. It will save you the stress of managing different loans, harmonise the interest you pay, and make tracking your debt payment progress easier.
The avalanche method is where you start with your biggest debt and ensure it is conquered.
With the avalanche method, you take on the biggest debt you owe by first paying minimum payment to all the other smaller loans and throwing everything else you have at the big loan. You start paying off the bigger loans faster while not defaulting on the smaller ones.
Once the biggest loan has been paid off fully, you start tackling the second biggest loan the same way. Pay minimum payment for all the smaller loans and throw everything you have into the now big loan. You do this till you clear all your debt. You will realise that as you reduce the money you owe, you pay off the smaller loan faster and faster, hence the avalanche method.
Read Also: 10 Unhealthy Debt Practices You Should Avoid
You should have saved for an emergency fund by this time of the year. If not, it is about time.
Festivities come with their fair share of risk. Having to drive for long distances to get to the village, your kids playing in the village on trees and going to the river and all manner of mischievous village activities, changing the weather as you spend time upcountry, all these and more are situations where the unknown can manifest, and it would be better off if you had an emergency fund to help you address it.
A lot of emphasis is usually put on saving for investing. Understandably so, because saving for investing is a proactive way of growing your money, however, it is wise to have an emergency fund.
An emergency fund is money that allows you to address issues that come up without your planning. These could be accidents, illness, or any other misfortune. An emergency fund helps you handle sudden issues without dipping into your savings for investment pot.
Taking money meant for investment can make you lose on valuable growth of your money.
When saving in your emergency fund, you can put it in an account that has liquidity and offers some interest on your money so that the money does not just lie dormant in an account.
Read Also: What is an Emergency Fund and Why You Need One
It is never too late to start investing. Even if you have not invested throughout the year, you can start before this December.
Investing is the way to secure your future. By taking what you have earned today and putting it into a productive asset, you can start cushioning your future. Hence, before you start having fun this December, it is wise to take a moment and reflect.
Have you invested? How much have you invested? Did you have a goal? Did you achieve it?
In Kenya, you can invest with as low as Ksh500. Starting your investing journey now will start cultivating the discipline and consistency you need to grow your money further in the coming year.
You can also start a retirement fund. If you have yet to open one within the year, you should have one this December and start contributing. A retirement fund might not seem critical when young, but it will prove necessary when you start catching up.
Read Also: 15 Investment Terms You Need To Know Before Investing
Subscriptions are very convenient. They are set up to be as less intrusive as possible. Only that they intrude on your bank account and take out some money - the subscription fee - without you having to do that.
This then puts them at the back of your mind. You forget how much the subscriptions are costing you.
Before starting this last month of the year, it is wise to take stock of all your subscriptions. How many streaming services are you paying for? How much is your internet bill? Your phone bills and so on?
A look into your subscription will tell you what is necessary and what is not. You can save money by opting out of the subscriptions to redirect to a savings account.
Your budget is vital to your finances as we head into the festivities. Your budget tells you what you can afford and what you cannot. It also helps you prioritise what to commit your money to and what not to.
As the year ends, it is high time you took a closer look at your budget and assessed how it worked for you. If it has not, then you readjust.
But also, as you think about your expenditure for December, have it in a budget. Do not just go out and start spending willy-nilly. You might end up denting your pocket more than you anticipated.
But also remember the new year is coming with its expenses. Therefore, make sure you put that in mind and factor it into your festive budget.
December is a special month of the year. That being the case, it does not negate the necessity of staying on top of your money. You must ensure December does not throw you further into debt or jeopardize your financial plans.
Furthermore, it is appropriate to reflect on what has worked throughout the year and what has not and come up with better adjustments for the following year.
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