Hellen Njeri @njerihelen
Setting financial goals is important, and nearly everyone sets a money goal every year. However, while achieving financial independence is an admirable goal, very few people know where to start and often find it hard to juggle multiple goals and to determine how to allocate savings. If you are starting to take steps towards financial freedom this year, here are some tips you should follow to build up a savings cushion – or a “rainy-day fund”.
1. Create an emergency fund
An emergency fund is an account for funds set aside to deal with an event of a personal financial dilemma, such as loss of a job, a devastating illness or a major contingency.
Without emergency savings in place, a straightforward task like an unexpected car repair or trip to the hospital could force you into debt and derail your goals. This can also force you to dip into your savings pool leaving your future bare.
2. Pay down high interest debt
Debt can get in the way of your savings efforts and make it challenging to reach your goals. Focus on paying down any high-interest debt you may have.
For example: Credit cards, tend to have higher interest rates, meaning your interest payments might cost more than what you could earn from saving or investing your money.
Paying this type of debt down can save you money in the long run. For bank loans and other credit facilities also, focus on repaying the interest first to control the period and any extra amounts.
3. Save for retirement
If you have an employer-sponsored retirement plan, such as a group-pension plan, be sure to contribute to it as early as you can. If you don’t have access to an employer-sponsored plan, you might consider opening an individual retirement account with a reputable insurance or wealth creation corporation.
More often than not, these savings plans offer certain tax benefits, and many employers will offer to incorporate or declare these information to the taxing authority in order for you as the employee to enjoy those benefits.
4. Save for short-term goals
Short-term financial goals are between three and five years. Examples of such goals are like: a down-payment for your home, a vacation-plan, a wedding or a trip to a popular destination. Look for an appropriate bank that will organise the plan for you at minimum cost while maximising on the benefits.
Also, the idea of saving may sometimes seem complex and grim, but to avoid this somewhat harsh reality, you can invent simpler and creative ways of saving. For example: Group saving (chama) is one way to ease the weight from yourself while still sticking to the original purpose.
Always ensure to hold fast to the rules of your group to avoid penalties. You can also have a separate account for that will help you to avoid interference with long-term savings plan.
5. Save for education
Recent research has shown that university degrees are more important now than ever. Having a bachelor’s degree can mean earning 66 per cent more money while employed than if you have a college diploma alone. But university education is also more expensive to acquire: Such critical needs should not get into your way of saving.
Do an estimate of how much your child’s university might cost and consider a tax-advantaged education savings plan. Make sure saving for your child’s education does not interfere with your own retirement or pension planning. Remember there are loans for school fees but not for retirement!
6. Divide your paycheck
Explore the option of dividing your paycheck between savings and regular or current account. Set a specific percentage to automatically deposit into your savings so you are less inclined to touch it while out, for instance, at the bar. You can also have a standing order.
Once money comes into the account it is diverted to the savings account. This can also help to increase interest rates which are generally higher for savings accounts than they are for regular or current accounts.
7. Focus on the details and learn to negotiate
While looking for a bank to start-off a savings account, choose one that makes the most sense for you. Seek out benefits like; no ATM fees, high interest on savings accounts, and no overdraft fees. Smaller banks often offer better interest rates and perks.
If your bank does not offer these benefits, then negotiate to see the possible options. Try to be smart about ATM trips. Explore the option of withdrawing a set amount regularly and stick to it. To stay organised, you can divide cash into envelopes with categories like “food”, “rent”, and “fun”.
8. Understand your cash flow
Nothing will affect your financial future more than your ability to understand your cash flow. If you want more money to save for the future, you have to understand your current spending patterns and habits to get there. Check in on your spending weekly. That takes far less time than a monthly review, and it’s easier to catch places you may have spent more than you planned. It’s a lot harder to catch up if you have been overspending for a month.