Personal financial management doesn’t have to be complicated, and you don’t have to understand what equities, treasury bills, derivatives, REITS, and Unit Trusts are to have a financially comfortable life. Much of what constitutes personal financial management has to do with common sense, and many good personal financial management practices can be adopted with relative ease. Here are eight money management mistakes that can hurt you, and how to avoid them.
1. Lifestyle inflation
Say you get a 10 percent income or salary raise. You may unthinkingly “improve” your lifestyle by 10 percent, whatever that means to you. Maybe you start eating 10 percent more meals out, or buy 10 percent more console games. Resisting this urge is one of the smartest things you can do, particularly if you have big goals like buying a house, paying off a car loan, or putting kids through college.
2. Stopping pension contributions when times are tough
When you or your spouse loses a job, or when a major unexpected expense comes up, it can be very tempting to stop pension contributions to cope with increased financial demands. This is especially true in Kenya because people tend to have less faith in National Social Security Fund (NSSF) and fear the contributions to private pension schemes may be too high at the time when they have lost an income stream or they are dealing with an expected expense. But this should be a last resort, after trying to reallocate resources in other ways, like by taking on extra work shifts, cutting expenses, or parking the nice car in favor of the cheaper-to-run car.
3. Paying bills late
There are all sorts of ways to avoid paying bills late. Automatic bill payment is an option, as is “budget billing” for utilities. You can also have your phone’s calendar alert you a few days before bills are due.
4. Paying unnecessary bank fees
Avoiding out-of-network ATMs and paying credit card bills on time helps you avoid paying unnecessary fees. And if you use a fee-happy bank, reconsider your options. Often, local banks and credit unions offer much better terms for checking and savings, and some even have perks like refunding out-of-network ATM fees.
5. Not taking advantage of savings matching
Does your employer match some of your pension contributions? That’s free money, and not taking advantage of it is a big mistake. Say your company gives a 50 percent match up to a 6 percent pension contribution. That means if you commit to putting 6 percent of your salary in pension savings, your employer will throw in 3 percent of your salary. Don’t walk away from an opportunity like that.
6. Having the wrong life insurance
When you have dependents, having life insurance is important, but it should be the right type of policy. A term insurance policy for seven to 10 times your salary is a cost-effective way to provide coverage for children for as long as they are dependent on you. Insurance agents may try to sell you a more expensive whole life policy, but these are not always best for young parents with lots of expenses.
7. Not having an emergency fund
It may not be fun to skim part of every pay cheque right off the top for emergency savings. And it’s not fun to put little windfalls into an emergency account either. But it’s definitely not fun to cope with a major car repair, a medical expense, or other financial emergency with Branch, Tala or M-Shwari loans, borrowing from friends and family, or taking out an overdraft or a bank loan.
8. Not having a budget
If you don’t have a budget, you don’t know what’s coming in and what’s going out, and you can’t see where you’re overspending.