Money Management
November 11, 2024
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It is everyone's dream to become financially stable and meet all their financial needs from earning, to spending, saving and investing.
While everyone may have a dream of being wealthy - which is different from person to person - many people fail to prioritise financial knowledge-building as the most important ingredient in this quest.
The process of wealth creation can be likened to a game and like every other game, one must have a good understanding of the rules involved. Those who don’t, lose the game - sometimes, very miserably.
In this article, you will learn about seven rules that can help you stabilise your finances and improve your chances of becoming wealthy.
Being Wealthy refers to when you are able to meet all your financial needs and can choose to stop working yet still have a sustainable revenue stream. It involves amassing valuable assets that enable money to work for you and further accumulate more revenue for you through investments.
The difference between being wealthy and rich can be as simple as the level of knowledge one has. That is, a wealthy person knows how to make money while a rich person has a lot of money. It takes consistency to create wealth and the end result will be sustainable prosperity.
A rich person can make money from several active income sources including employment, business, commission, allowances and lottery. But this requires you to actively participate in generating the income and can only last for a short period of time. That is when you are still working or running the business by yourself.
A wealthy person on the other hand, as earlier alluded to, does not necessarily need to keep working actively to earn an income.
Everyone has the capacity to be wealthy, but it is a long process with principles to be adhered to. It is a step-by-step process that requires patience and determination.
The understanding of the rules if far more important than the face value of a paycheque of any size. You could, for example, be earning more than Ksh100,000 per month - which only a small percentage of employed Kenyans do - but fall off track and descend to financial ruin.
Let us explore some of the rules of the game of wealth-building.
Paying yourself means setting aside a percentage of your income for future use before spending a single shilling from your paycheque.
You should make a monthly budget that defines how much you want to save and spend. The 50/30/20 budgeting method is an easy one for beginners.
This means you set aside 50% of your income for your daily expenses like rent, utility bills, food and groceries. Then 30% of the income goes to miscellaneous expenditures like holidaying, entertainment, and eat-outs.
The remaining 20% goes directly to your savings account. This can be automated to avoid saving a lower percentage due to unexpected expenses.
To build wealth, you save this amount first and make sure it doesn’t go to expenditure - come what may!
By paying yourself first, you are building a fund for investment to secure your future - that is why it is called paying yourself first.
You are putting away part of your income now so that in the future you do not have to work so hard - which as we have seen from the definition of wealth, is what wealthy people do. They don’t really have to work to live a high quality life.
Money can earn you more money without your active involvement if you tactfully utilise passive sources of income.
Passive income refers to earnings derived from sources where you have no direct involvement in generating it, such as dividend income, interest income, rental income, capital gains income, royalties, licensing and business income.
Making money work for you involves investing a percentage of the money saved in a variety of asset classes such as fixed income assets (such as bonds and fixed deposit accounts), cash and cash equivalents, real estate, equities (such as, stocks), commodities, and currencies.
Equities: Refer to company shares that earn a profit when the value of the company appreciates. The shares can be acquired by direct investment through stocks-having a trading account or investment via mutual fund-pooled investment in stocks and bonds.
Fixed income: This is income generated from fixed interest or dividends earned on low-risk investments like bonds, money market funds, or certificates of deposits (CDs), commonly known as fixed deposit accounts.
Cash and cash equivalents: These are short-term investments that have high credit quality, low risk and are highly liquid. They include treasury bills, commercial papers, marketable securities, money market funds, and short-term government bonds.
Real estate: Real estate investment involves purchasing a property like a home, land, commercial plots, or office building and selling it at a later date to maximise returns. If you do not have the prohibitively high initial capital to directly invest in real estate, you can invest indirectly through Real Estate Investment Trusts (REITs).
Commodities: Investing in commodity funds such as index funds, and feature-based funds involves purchasing raw materials or agricultural products and selling them to make profits. A commodity fund can protect investments against inflation.
Currencies: Investing in currencies involves buying or selling foreign currencies like the dollar, pound, euro or rand, via the foreign exchange market. This capitalises on fluctuations in currency values to maximise returns.
These kinds of investments earn value for your money, which could progressively increase your net worth depending on how well you are able to manage risks.
Although generally saving your money is great, you should only do so with a larger goal of investing the pool of funds you are building and not just saving for the sake of it.
It’s as simple as it sounds. Every month, you must make sure you spend less than the sum of all your income. This is true for employment income as it is from business income or if you earn from both.
But it is more than just spending less than the sum of what you earn. You must aim to spend significantly less than what you earn - otherwise, if say you earn Ksh30,000 and spend Ksh28,000, you are really not doing better than the guy who spent the whole amount and took a Ksh2,000 digital loan.
To do this, you have to create a proper budget that clearly puts a monthly limit to your spending. To adhere to the budget means you will have to come up with efficient cost-cutting measures that make sure a significant portion of your income goes to savings and investments which are at the core of wealth-building.
Spending less than you earn may also mean that you have to find ways to earn more if you realise that your fixed expenses are just about equal to your income or more.
If you do not have a budget yet, the 50/30/20 budget rule can be a good starting point. Half of your income goes to fixed or essential expenses, 30% can be spent on discretionary expenses and 20% is mandatorily assigned for savings.
Wealthy people, and even those on the path to achieving what many people would call wealthy status, master the skills necessary to stop living paycheque to paycheque very early. And spending less than you earn, is a big step.
Learn More>> 15 Ways to Stop Living Paycheck to Paycheck
Emergency fund refers to money set aside with an aim of meeting unexpected future expenses. For instance, the loss of your job, a debilitating illness, or a major repair to your home or car and so on. The fund can save you from financial distress and improves your financial security by creating a safety net.
Having money in an emergency savings account is significant in your wealth creation journey, as it helps you avoid the trap of expensive emergency debt. When your car breaks down, do not have to dip your hands in your expenditure money or other savings with different financial goals.
With an emergency fund, you could keep yourself out of debt, repaying on time and economic turbulence like loss of job, temporal closure of business or change of career cannot derail you from your path to financial freedom.
Read Also: Six Simple Ways to Jump-start Your Emergency Fund
Borrowing money could help you meet some of your financial obligations like paying school fees if you did not set up an education fund earlier in life, buying a home or financing your business.
Debts are good if you know how to use them. Some people borrow money and end up buying depreciating assets like cars and electronics, making it difficult to repay the debt back.
Generally, loans are best when utilised in appreciating properties like land/plot, homes, business machinery and so one - the most ideal situation always being getting a loan for a purpose that can generate enough returns to repay the borrowed amount and leaving more for your consumption. In even simpler terms, a loan that pays itself.
Knowing how to utilise your loan keeps your journey to financial freedom on track.
Learn More>> How to Build Wealth Using Other People's Money
Learning is a continuous process - even in your wealth creation quest - you need to equip yourself with new skills relevant to the marketplace.
Upskilling improves your demand in the job market and this could be a vital step in ramping up your revenue streams.
Continuous learning involves acquiring knowledge of social skills, economic skills, self-development and keeping tabs on the current happenings. It helps you make informed decisions on your finances.
For instance, gaining knowledge of real estate, stock market and business trends could help you make informed decisions on the kind of investment that can bring value for your money.
Learn More>> 9 Financial Topics You Need An Understanding Of
Having a lot of money does not mean you will be happy. It all depends on your spending habits. If you are a spendthrift, with the urge to spend more, you could be forced to dip your hands into your savings or pose a strain on your monthly budget. This behaviour is not healthy and might negatively impact your wealth creation journey.
Spend money on things that will give you longer happiness, including buying a home, educating your child or buying land. Money brings about happiness when you plan and set goals to achieve with it.
You could as well earn money and happiness when you use it to experience the world. Planning on a trip with your family to the coast, swimming or taking a tour to places like Maasai Mara could open your world of opportunities to generate wealth while reaping the happiness dividend simultaneously.
Read More>> Money and Me: 5 Spending Principles That Bought Me Happiness
Wealth creation can be likened to a game guided by money rules. And the failure to master each of these rules means you are out of the game - you are watching on the sidelines as the pros run the show.
The rules involve planning, budgeting and mastering responsible money habits and maintaining consistency in your quest for financial freedom
Rich people tie their time to money while wealthy people draw clear lines between time and money - they allow money to work for them, building long-term revenue streams like investments.
Read On>> Key Differences Between Being Rich and Wealthy You Should Know
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