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By Prince Sam O. Idika
We have entered the half year mark for 2019. The question that should haunt us all is this: Am I meeting my Financial goals? If your response leaves you with heart palpitations, don’t worry. It’s never too late to create financial goals to give yourself and your family financial security and freedom.
Here are the best practices and tips for personal finance:
1. Create a Budget
A budget is essential to living within your means and saving enough to meet your long-term goals. The 50/30/20 budgeting method offers a great framework. It breaks down like this:
- 50% of your take-home pay or net income (after taxes, that is) goes toward living essentials, such as rent, utilities, groceries, and transport.
- 30% is allocated to lifestyle expenses, such as dining out and shopping for clothes.
- 20% goes towards the future: paying down debt and saving both for retirement and for emergencies
It’s never been easier to manage money, thanks to a growing number of personal budgeting apps for smartphones that put day-to-day finances in the palm of your hand. Here are just two examples: YNAB, aka You Need a Budget, helps you track and adjust your spending so that you are in control of every naira you spend. Meanwhile, Mint streamlines cash flow, budgets, credit cards, bills, and investment tracking—all from one place. It automatically updates and categorizes your financial data as information comes in, so you always know where you stand financially. The app will even dish out custom tips and advice.
2. Create an Emergency Fund
It’s important to “pay yourself first” to ensure money is set aside for unexpected expenses such as medical bills, a big car repair, rent if you get laid off, and more.
Between three and six months’ worth of living expenses is the ideal safety net. Financial experts generally recommend putting away 20% of each paycheck every month (which of course, you’ve already budgeted for!). Once you’ve filled up your “rainy day” fund (for emergencies or sudden unemployment), don’t stop. Continue funneling the monthly 20% towards other financial goals such as a retirement fund.
3. Limit Debt
It sounds simple enough: To keep debt from getting out of hand, don’t spend more than you earn. Of course, most people do have to borrow from time to time—and sometimes going into debt can be advantageous, if it leads to acquiring an asset. Taking out a mortgage to buy a house is one good example. But leasing can sometimes be more economical than buying outright, whether you’re renting a property, leasing a car, or even getting a subscription to computer software.
4. Use Credit Cards Wisely
Credit cards can be major debt traps. But it’s unrealistic not to own any in the contemporary world, and they have uses other than as a tool to buy things. Not only are they crucial to establishing your credit rating, but they’re also a great way to track spending, which can be a big budgeting aid.
Credit just needs to be managed correctly, which means the balance should ideally be paid off every month, or at least be kept at a credit utilisation rate minimum (that is, keep your account balances below 30% of your total available credit). Given the extraordinary rewards incentives on offer these days (such as cash back), it makes sense to charge as many purchases as possible. Still, avoid maxing out credit cards at all costs, and always pay bills on time.
Using a debit card is another way to ensure you will not be paying for accumulated small purchases over an extended period—with interest.
5. Consider Your Family
To protect the assets in your estate and ensure that your wishes are followed when you die, be sure you make a will and—depending on your needs—possibly set up one or more trusts. You also need to look into insurance: not just on your major possessions (auto, homeowners), but also on your life. And be sure to periodically review your policy to make sure it meets your family’s needs through life’s major milestones.
Other critical documents include a living will and healthcare power of attorney. While not all these documents directly affect you, all of them can save your next-of-kin considerable time and expense when you fall ill or become otherwise incapacitated.
And while they’re young, take the time to teach your children about the value of money and how to save, invest, and spend wisely.
6. Pay Off Student Loans
There are myriad loan-repayment plans and payment reduction strategies available to graduates. If you’re stuck with a high interest rate, paying off the principal faster can make sense. On the other hand, minimizing repayments (to interest only, for instance), can free up other income to invest elsewhere or to put into retirement savings while you’re young and will get maximum benefit from compound interest (see Tip No. 7, below).
7. Plan (and Save) for Retirement
Retirement may seem like a lifetime away, but it arrives much sooner than you’d expect. Experts suggest that most people will need about 80% of their current salary in retirement. The younger you start, the more you benefit from what advisors like to call the magic of compounding interest—how small amounts grow over time. Setting aside money now for your retirement not only allows it to grow over the long term, but it can also reduce your current income taxes if funds are placed in a tax-advantaged plan fund like an Individual Retirement Account (IRA).
Investing is only one part of planning for retirement. Other strategies include waiting as long as possible before opting to converting a term life insurance policy to a permanent life one.
8. Maximise Tax Breaks
Due to an overly complex tax code, many individuals leave hundreds or even thousands of naira sitting on the table every year. By maximizing your tax savings, you’ll free up money that can be invested in the reduction of past debts, your enjoyment of the present and your plans for the future.
You need to start each year saving receipts and tracking expenditures for all possible tax deductions and tax credits. After you’re organized, you’ll then want to focus on taking advantage of every tax deduction and credit available, as well as deciding between the two when necessary. In short, a tax deduction reduces the amount of income you are taxed on, whereas a tax credit actually reduces the amount of tax you owe. This means that a N1,000 tax credit will save you much more than a N1,000 deduction.
9. Give Yourself a Break
Budgeting and planning can seem full of deprivations. Make sure you reward yourself now and then. Whether it’s a vacation, purchase, or an occasional night on the town, you need to enjoy the fruits of your labor. Doing so gives you a taste of the financial independence you’re working so hard for.
Finally, don’t forget to delegate when needed. Even though you might be competent enough to do your own taxes or manage a portfolio of individual stocks, it doesn’t mean you should. Setting up an account at a brokerage, spending a few thousand naira on a Financial Planner—at least once—might be a good way to jump-start your planning.
Three key character traits can help you avoid innumerable mistakes in managing your personal finances: discipline, a sense of timing, and emotional detachment.
