Pauline Muindi
There’s no shortage of money advice. You have probably come across
numerous “rule of thumb” guidelines. But as you might have realised,
while the rules are a good place to start, there’s no one-size-fits-all
advice when it comes to personal finance.
Every individual has unique circumstances, needs, and goals. Therefore,
blindly following every piece of financial advice might not lead to good
results.
There are basic rules in finance you’re better off following. But there
are some that you can bend without wrecking your finances.
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Here are some of them:
1. Don’t Borrow Money to Invest
You might have heard that relying on borrowed money to invest is a
no-no. According to financial experts, although this tactic has been
used by many investors for decades, it can ruin the average individual
investor.
In a 1991 speech at the University of Notre Dame, billionaire Warren
Buffet reportedly said “I’ve seen more people fail because of money and
leverage – leverage being borrowed money.”
Financial experts agree that borrowing against an important asset, such
as your house, to buy stocks is a bad move. However, there are instances
where borrowing to invest makes sense. When the return on investment of
the loan is high and the risk is low, then a loan is definitely good.
A prudent investor also makes sure that the investment will mature
before the loan is due. Certificates of deposit or bonds are great
investments for someone who’s using borrowed money.
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2. Don’t Use Credit Cards
Credit cards make it super-easy to spend money that you don’t have,
getting you deep into debt. No wonder most people feel that it’s best to
avoid credit cards.
But if used wisely, credit cards are not that bad at all. Having credit
cards can help you build credit score, which can make you eligible for
more credit. Credit cards also come with awesome incentives and rewards
such as travel points and even cash back. They can also be a tool to
track your spending while also protecting yourself from the risk of cash
payments.
Instead of using credit cards to go on crazy spending sprees you can’t
afford, stick to your budget and spend within your means. Focus on your
credit card balance- not the card limit. Rather than just making minimum
monthly payments, set auto payments from your checking account to pay
credit card debts in full. By paying the entire balance as soon as you
get your statement, you will avoid accruing interest and thus escape the
credit card debt trap.
3. Save 10 per cent of Your Income for Retirement
SEE ALSO :Why you earn 5 times more now but still have no savings
Saving
10 per cent of your income is the golden rule when it comes to
preparing for old age. However, with longer life expectancy and rising
costs of healthcare, in many cases 10 per cent isn’t enough. This is
especially so if you start saving for retirement when you’re already in
your 30s or older. If your income fluctuates, saving 10 per cent of the
cheque might also not cut it.
Think of 10 per cent as a good place to start. Any money saved is better
than having no savings. However, to have sufficient funds for your
golden years, you have to save more. If you have a short-term
high-paying job, you might have to put aside as much as 50 per cent of
your pay check. By saving more when you can, you will have a cushion
when you have major reductions in your income.
Another scenario where the 10 per cent rule doesn’t apply is when you
simply can’t afford it. You might have unforeseen expenses or loss of
income. In that case, it is better to put as much as you can afford to,
even if it’s less than 10 per cent instead of being dissuaded from
saving at all.
4. Spend No More than 30 per cent of Income on Housing
Spending 30 per cent of income on housing is a common benchmark when it
comes to budgeting. This idea comes from US housing regulations in the
1960s, where studies established a rent threshold of 25 per cent of
family income because of the rising costs of living. In 1981, the rent
threshold had risen to 30 per cent of family income.
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But
using rent standards crafted decades ago for a different society might
not be realistic today. A 2012/13 study by Kenya National Housing Survey
found that Nairobi residents spend as much as 40 per cent of their
income on housing.
Consider affordability, instead of focusing on the 30 per cent rule.
Considering factors such as how much you earn, your debts, where you
live, rent can be more or less than 30 per cent of your income. If you
live in an expensive city or neighbourhood, work on earning more. In the
long run, that might be easier and more affordable than relocating. On
the other hand, if you in less expensive towns, you don’t have to spend
30 per cent on housing. In that case, you have more wiggle room and can
channel the rest of the money into your savings or investments.
5. Pay off Mortgage before Saving for Retirement
A mortgage is a long-term loan, and you might feel pressed to pay it off
before you start setting money aside for retirement. After all, not
having a major loan hanging over your head, and having a home that is
fully yours gives you and your family security.
However, financial experts say that paying off your mortgage at the
expense of retirement savings is not always a smart move. If you can pay
off the house you plan to stay in for five years or more after the debt
is paid, it makes sense to focus on paying off the mortgage as soon as
you can. If not, you’ll be better off saving the money for retirement or
investing it in assets that have potential for growth. The key is to
prioritise your expenses.
6. Buy in Bulk
Buying household goods in bulk makes sense, especially when you buy
goods on offer or from wholesale shops. However, buying in bulk doesn’t
work for everyone, and it can even cost some people more money.
In studies, shoppers have confessed that they bought more than they needed when they came across “super deals.”
Additionally, perishable goods bought in bulk can go bad even before
you’ve had a chance to get full value from them. Instead of buying in
bulk, buy only what you need and can use within a specific time period.
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