What you need to know:
- If you cannot manage Sh100, you will not be able to manage Sh100 million when you get it
- Many times we spend bits and pieces of money here and there mindlessly
One of the most talked about topics in personal finance has to be financial discipline. If you don’t learn how to account for your money and manage it, nothing else will make sense. A budget is one of the tools people use to manage money, but there is more to discipline than writing down your spending plan on a piece of paper.
Most people like to hide behind the excuse that they are waiting for a time when they have huge amounts of money, before they start tracking where it all goes. But the thing is that you cannot spend your money aimlessly, no matter how little, and still manage to create wealth.
If you cannot manage Sh100, you will not be able to manage Sh100 million when you get it. This is because the attitude you have about that little money is the very attitude you will have when you get more money. For example many people who win millions in lotteries find themselves worse-off financially, a year or two later.
If you are not deliberate about how you spend money, you will be caught up in a vicious cycle of working to earn more to spend more. The world will never run out of things to buy and the general cost of living continues to rise as long as you live. The only thing that can take you off that trap and put you on the path to creating wealth is financial discipline. This means controlling yourself and your spending habits.
With discipline, you are able to delay or forfeit the purchase of certain things today because they are not part of the big picture.
REAL VALUE OF MONEY
You will also be able to make the necessary lifestyle changes that take you closer to your goals. Most of the questions I receive around expenses revolve around lack of discipline. People spend money they do not have and ask me how they can control impulse spending.
It is not that hard; you can become more disciplined if you put a monetary value to your time and effort it takes to get an income. Let me explain. Many times we spend bits and pieces of money here and there mindlessly. You have Sh50,000 in the bank on payday and you take out Sh5,000 for a night out without thinking. You made that decision knowing that you still have a chunk of money left in your account. It is not a big deal, right?
However, if you knew exactly what it takes for you to make that Sh5,000 you might make a better choice. To put it another way, if you tell a business owner to spend Sh50,000 on something, he will remember how difficult it is to make that money and will consider whether spending that money is worth it. You can do the same with your money. How much is an hour of your time worth? Say you earn a net income of Sh50,000 a month.
You work eight hours a day, five hours a week. That is 40 hours a week and a total of 160 hours a month. Your hourly rate is Sh312.50 (Sh50,000 divided by 160 hours).
Now think about everything you have to do at work every hour to earn that money: responding to client queries, meetings, working on projects, designing a website, etc. It takes you a full hour and a lot of labour to earn Sh312, but how quickly do you spend it?
Do you even think about it when you buy lunch for Sh300 every day? You might literally be spending one hour of your labour for every lunch you buy. You have to start asking yourself whether it is worth it.
Now think about that Sh5,000 you spent on one night. You blew away 16 hours of your labour in four hours. Again, is it worth it?
When you start becoming aware of what it takes to earn the money you spend, you start evaluating your choices before you let any money out of your pocket.
Yes, you may go on a night out but you will not do it every weekend. You may decide to carry lunch from home instead of eating out. This kind of thinking helps you come to grips with the implication of your spending and makes you more cautious.
After doing this exercise, one of the participants in our current class said she is now able to walk away from buying a pair of shoes on impulse because she has realised that it will take her many hours to pay it off.
Moreover, when she spends money it is based on a conscious decision and she buys things she truly values. She is now more aware and is now an active participant in managing her expenses. Try it for yourself and let me know whether it works for you.
Waceke runs a program on personal financial management. Find her at [email protected]| twitter @centonomy