How to Make the Most Out of Your Money Amid the High Cost of Living

‍EDITOR’S NOTE: This article is part of our Money254 Partner Series produced in partnership with Absa Bank Kenya to celebrate the launch of their new digital savings account. For more on Absa’s new digital savings account, read here.

The rise in the prices of everyday essentials like groceries and fuel has led to a higher cost of living. This phenomenon is known as inflation and happens when economic and other forces drive prices up and reduce consumers’ purchasing power. 

According to data published by the Central Bank of Kenya (CBK), Kenya’s annual inflation rate as of July 2023 stood at 7.28%. In other words, you would need 7.28% more money to buy the same basket of goods and services that you could buy last year in July 2022. 

To avoid the effects of the high cost of living, it is imperative that you adopt methods to handle expenses and maintain a sense of normalcy without adding extra financial strain. If you decide just to wing it, inflation can affect your finances and long-term goals by increasing your expenses, preventing you from saving, and worse, reducing your savings' value and purchasing power. 

This article will explore five steps you can take to make the most out of your money amid the high cost of living.

Prioritise Needs Over Wants By Practicing Mindful Spending  

The first step you need to take to deal with the increasing cost of living is to close the leaks in your budget. The best way to do that is by practicing mindful spending and separating needs from wants. 

Let's look at an example. Suppose you regularly spend on non-essentials, say Ksh100 daily on unnecessary snacks or gambling. If you could cut those expenses, that's Ksh3,000 a month or Ksh36,000 a year, which could go to your savings.

Needs are essential things that are crucial for your daily life and cannot be ignored. Most needs are fixed expenses, allowing you to incorporate them into your budget well. They encompass expenses like rent, utilities, school fees for your kids, and transportation.

On the other hand, wants are not as critical as needs. Failure to satisfy your wants will not threaten your survival, but they still hold importance. Expenses tied to wants can fluctuate since your current desires influence them. This category includes discretionary spending and entertainment expenses.

Prioritising needs over wants is vital. If you don't make thoughtful choices, your wants might lead you to lose control and overspend. Distinguishing between your needs and wants helps in tracking your expenses, reducing costs, and increasing your savings. All this can ensure you survive the high cost of living today and plan for the future.

Smartly Save Up For Big-Ticket Items In Advance

One of the most brilliant things you can do when planning a big purchase is to start saving up for it in advance. This way, you can afford the item without feeling the pinch as much. Importantly, it can help you avoid last-minute borrowing, avoid unnecessary debt and ultimately reduce stress. 

But with the cost of living increasing, how you save matters. Using your traditional bank savings account, saving in your mobile wallet, or under your pillow might get you there but at a cost. 

As established above, inflation leads to a rise in the prices of goods and services. It also reduces the purchasing power of your money. To prevent this and ensure your money maintain its value, you should consider saving your money in an account that protects you against inflation.

An account that acts as an inflation hedge aims to provide returns that at least keep pace with or exceed the inflation rate. 

Take the Absa Digital Savings Account as an example. The account offers inflation-beating returns of 9% interest per annum. Additionally, it offers daily interest accrual and monthly compounding to maximise your returns. This means the value of your savings will increase and stay ahead of the rising cost of living. 

Revamp Your Budget To Cut Costs 

When prices go up and you need to tighten your belt, the first thing to do is to take a closer look at where every shilling is going. It’s time to review and revamp your budget! 

If the rising cost of living is undercutting your purchasing power and causing budget deficits, then it’s important to examine your usual spending and make necessary adjustments. 

Luckily, you can tighten your budget buckets in multiple ways without compromising the quality of your lifestyle. Here are some examples you can consider:

• Skip Brand Products: Finding and buying generic brands will save you money and leave you with more disposable income to save.
• A break from takeaways: While convenient, takeaways can significantly chew through your disposable income and put more pressure on your household budget. Instead, opt in for meal planning, cook food at home, and eat leftovers.
• Streamline your subscriptions: Review which ones you’re signed up for and consider cutting out the unnecessary ones. Additionally, for streaming subscriptions, consider sharing passwords with friends where possible and opt for a family subscription instead of individual plans.
• Reassess your debt repayment: If you are servicing any debt and the rising inflation has increased your monthly repayments and strained your finances, consider looking for ways to make it more manageable. You can consider refinancing, debt consolidation, or negotiating with your lender. 

While adjusting your budget can make handling the financial effects of the rising cost of living easier, you should also ensure you can keep track of and monitor your expenses and savings conveniently. The Absa mobile banking app comes with these features. 

Prioritise Saving Over Spending

As the cost of living rises, it is easy to forget about saving money or to treat it as an afterthought. To avoid this, consider adopting the "pay yourself first" strategy.

Paying yourself first means setting money aside from your paycheck as savings before spending a shilling. The idea is to treat saving as a priority. So instead of saving what's left after paying your bills and expenses, you spend what's left after saving.

The "pay yourself first" strategy effectively ensures that you consistently set aside your intended savings every month, even as the cost of living increases. This approach eliminates the urge to skip saving and use the money for other expenses.

Regularly contributing to your savings enhances your ability to handle unexpected situations and establish lasting financial stability.

In addition to the "pay yourself first" strategy, consider separating your savings into a dedicated account and automating contributions. Savings account such as the Absa Digital Savings Account allows you to use standing orders from your salary/current account to automate savings.

Maintain Optimal Liquidity

You have definitely heard about the popular phrase, "cash is king" - but have you ever stopped to wonder what it means?

Cash is king means that having liquid funds, such as cash at hand or in a bank account, available is vital because of the flexibility it provides. The phrase emphasizes the value of having easily accessible funds. In personal finance, liquidity usually falls into two categories

The first is the precautionary liquidity one needs to finance unexpected events such as abrupt job loss, unexpected medical bills, or a car breakdown. This is called an emergency fund. 

Typically, you should save the equivalent of three to twelve months of your monthly expenses as emergency funds, depending on your financial needs and job security. This money is meant to prevent you from digging into your savings or going into debt when you need to settle unexpected bills.

The second one is the discretionary liquidity or opportunity fund. This form of liquidity focuses on having ready cash to capitalize on potential opportunities. It enables you to take advantage of favourable circumstances, whether it's investing in a promising venture, purchasing assets at discounted prices, or participating in time-sensitive investments. 

Having cash readily available allows you to act swiftly, potentially reaping benefits that might not be possible if you lack the necessary funds. 

When it comes to where you save your emergency or opportunity funds, there are different levels of liquidity. Several factors, including accessibility, withdrawal penalties and restrictions, lock-in periods, account and transaction fees, online banking capabilities, and transaction limits, usually determine the liquidity of a savings vehicle.

The more liquid a saving vehicle, the more ideal it is for saving your emergency and opportunity funds. One of the most liquid savings accounts in Kenya you can consider is the Absa Digital Savings Account. Here is why.

The Absa Digital Savings Account offers:

1. 24/7 access to your money and account, as the account is fully digital.
2. Quick withdrawals compared to other saving vehicles such as fixed deposits or MMFs.
3. No minimum initial deposit or balance is required.
4. No account maintenance (ledger) or transaction fees, which maximizes your savings.
5. No lock-in periods, allowing you to use your money whenever needed without limitations.
6. Flexibility to manage your funds without worrying about penalties or restrictions as the account offer no withdrawal limits.

WRAPPING UP

Feeling anxious about money is common and normal, especially when the living cost keeps increasing. However, panicking may not be an option, especially when considering inflation is out of your control. 

Therefore, instead of stressing about it, it is best to adapt your finances to reflect the changing times and stay focused on your financial goals.

Firstly, review your budget to ensure it accommodates the price increases and cut expenses to ensure you can meet your savings goals. Secondly, save your money where you get real value. If you prefer bank accounts, the Absa Digital Savings Account offers the highest returns among commercial banks in Kenya - 9% p.a. You can open it online here, in a process that takes less than ten minutes.  

Also Read: How to Open Absa Digital Savings Account: A Step by Step Guide

Finally, remember to explore ways to increase your income, whether by asking for a raise or starting a new business.