If you don’t want to end up like Kwaku Frimpong by year’s end, managing your personal finances should be a top priority skill on your to-do list. Personal finance organization is about understanding your financial situation, being financially disciplined and taking control of how money comes and goes in your life.
An important angle on personal finance management is the path to an effective way to keep your intelligence above emotions while making finance-related decisions. It is equally important to note that personal finance is not about knowledge to control cash movement but a feeling that you are responsible for securing the financial future for you and your family.
A people’s financial freedom is largely tied to their individual persons’ financial security. That is why I feel that understanding how to deploy simple skills of personal financial management should be key in discussions on Ghana and Africa’s poverty alleviation goals.
Here are some tips that will help you become financially sound and secure.
- Analyze your current financial position.
It is necessary to thoroughly observe and understand your spending habits and patterns. Different people have different traits and show varying behaviour with money. So, asking the following questions to yourself can be very helpful:
- Do I consistently overspend?
- Can I easily meet unexpected expenses?
- Am I living paycheck to paycheck?
- Do I need to improve my financial habits?
Answering these questions will trigger your financial sense and give you an idea of whether you seriously need to consider overhauling your personal finance management habits. If you find there is a problem, the next tips can be helpful in regaining control of your financial life.
- Always make a budget.
- Making a budget is a great way to control emotional expenses. It’s a great way to avoid emotional traps and ensure that your spending is controlled, expenses remain on track, and money is saved. Likewise, it can be an effective tool to make better financial decisions, crush prevailing debt, and achieve long term financial goals.
However, it’s important to note that the budget only adds value when analysed with the planned approach. Financial mistakes made in one period mustn't be made in subsequent periods. This makes making a budget the first step towards achieving financial discipline and serves as a building block for effective financial management.
Tips to get the most from your personal financial budgeting process:
- Be realistic – do not set unrealistic targets
- Remain consistent
- Regularly track your finances
- Make your priorities clear from the start
- Always keep your financial goals in mind
- Make the budget well-detailed (map expenditure in different categories)
- Ensure a data-driven approach to spending (each expense must be well documented).
- Pay off your debts.
- There’s a saying that you don't need pieces of finance but rather financial peace [I think I just made my first dad joke!]. Paying off debts is important for your financial health and emotional stability. One thing you need to do is ensure that your spending remains under your income. This simple adjustment helps you not enter into debt.
However, if you have entered into debt, here are some tips that will help to get rid of it:
- List all of the debts by interest rate. For instance, there can be different loan types that include personal, home, car, secured and unsecured loans, among others.
- Sort all loans with perspective to interest rate, highest being on top of the list and lowest at the end.
- Repay higher interest loans first.
- Sell unnecessary items that have not been used recently. One simple guideline could be to sell items that have not been used for at least one year. It can be good to use proceeds raised by selling unnecessary items to pay debt with higher interest rates.
- Temporary downsizing can be a logical choice. It's a good idea to re-evaluate your discretionary expenses. These include gratification expenses, dine out expenses, entertainment expenses, unnecessary subscriptions, depreciating assets, etc. Likewise, the removal of non-value adding objects can be a good option.
- Paying debt with a second income can be an excellent idea. Suppose there are two working members in your home. The salary of one member can be used to meet kitchen expenses and savings targets. On the other hand, the earnings of another member can be used to repay debt.
- Additional sources of income can be discovered. For instance, part-time work can be explored like content writing, photography, blogging, part-time teaching, etc.
- The establishment of emergency funds can be another move to avoid raising debt. Emergency funds should be carefully maintained to avoid a situation that compels you to raise a further loan. Pro-tip is that emergency funds can be invested in the liquid funds. So, it keeps generating value and can be reused in time of need.
An important thing to understand is that you need to get rid of debt yourself. It's true that you'll need some form of inspiration. However, inspiration comes with an action that motivates your mind to remain financially disciplined to achieve financial peace. Start repaying debts today and make a mind to live debt-free life at any cost!
- Always look for appreciating assets.
There are two types of assets in the world: depreciable and appreciable. Depreciable assets will always lead to a rise in your list of expenses. So, these should be minimized as much as possible. On the other hand, appreciable assets have the potential to enhance income and build further assets. So, these should be maximized.
Let’s understand how appreciable and depreciable assets make a difference. Let’s say you have a car (depreciable asset). For each day you own the car, it gets old and decreases in value. So, it's a depreciation expense for you. On the other hand, if you own land, its value is expected to increase with inflation and the increasing population. So, it can be a good idea to own appreciable assets rather than depreciable ones from a financial management perspective.
- Start investing today
- Investment is not about being able to put millions and billions into gold, commodities, or financial instruments. Instead, it’s a name given to an attitude that needs to be developed from the very start. Often, people think only the rich and the affluent can invest. However, that's a myth and not reality. The fact is, one single cedi you have can be invested to generate a return.
I think saving money is good. I have nothing against saving. Nonetheless, let’s not mistake putting money in a savings account long-term as “investing”. From a basic mathematical standpoint, it’s not.
The rate of inflation in Ghana is expected to be about 10.0% by the end of this quarter. Comparatively, the highest interest rate on a savings account now is around 5.5%, and that’s even on savings above ~GH¢500,000. Do simple subtraction and you’ll quickly realise that there’s effectively a loss of 4.5% (10.0%-5.5%) on that money in your long-term savings account.
Do not depreciate the value of your money. If you want to save money long-term, put it into safe and secured investment opportunities, like Treasury Bills. Also, beware of the many Ponzi schemes that promise unrealistically high-interest rates.
I asked the team at Maxwell Investments Group what managing personal finances mean to each of them. Our Director for Social Impact & ESG, Mr. Rya G. Kuewor, gave an interesting perspective on “savings”.
“Optimising and managing one’s personal finances go all the way back to one’s future goals. Let’s work backwards on this and ask if our present savings lifestyles will create financial space for our future goals. Most of us these days know the colloquial rules of saving, or tithing, or setting aside, but we need to understand that if saving (cash) is not truly personal, I dare say even emotional, you’ll go month to month, and still emerge six pence none-the-richer!
And he’s absolutely right! We, therefore, need to find a personal or emotional reason to save and pay a non-negotiable tithe to ourselves but in a way safely tucked away in a secured set-up. The key here is to hold yourself passionately accountable for the future you.
What should be done to achieve personal financial freedom in a nutshell?
The science of personal finance is simple and straightforward to understand. However, it can be difficult to implement the same due to our emotional involvement.
The simple cycle to manage personal finance is:
- Develop a habit to save
It can be the most difficult part as it has to deal with your emotional brain. There are ways to enhance savings. The first one is to increase your current income so you have excess to save, but that may not always be a feasible option. Another option is to reduce expenses. That can be done by introducing a finance-related disciplinary approach to your lifestyle. The adoption of financial discipline includes analysing the current financial position, developing a habit to make a budget, paying off debts, making smart investments, and repeating the process.
- Pay off debts
The simple reason is that debt comes with the cost of interest. So pay them off. Also, repay loans with higher interest rates first.
- Make smart investments
This part of personal finance management requires market understanding and finding investment opportunities. Making the right investment is about meeting your purpose to invest and alignment with your risk appetite.
- Repeat the process
Repeat the process to save, pay off debts, and invest. Save, pay off debts, and invest. Save, pay off debts, and invest. Higher, smarter investments are expected to bring higher profit and a better financial future.
Religiously following the outlined process of budgeting, repaying, saving, and investing can be more than effective to control finances and living a life free from financial stress and full of financial peace.
I hope you enjoyed the read. Hit me up and let’s keep the conversation going! I read all the feedback you send me. Also, feel free to throw at me topics you’d like to read or hear my thoughts on. You can always head to my Calendly to schedule a quick chat by going to calendly.com/maxwellampong. Or connect with me your way through my Linktree: https://linktr.ee/themax.
These are all facts. And this has been an opinion piece.
Have a blessed week!
Dr. Maxwell Ampong is the CEO of Maxwell Investments Group, a leading supplier of impact products & services and ICT worldwide. He is also the Co-Founder of The RIO Corporation, connectors between impoverished communities and impact solutions worldwide. He writes about trending and relevant economic topics, and general perspective pieces.