File photo (Image: psychologytoday.com)
You’ve never set a budget
According to www.dailyworth.com, having a written budget is one of the most important steps to financial freedom and living within your means. So if you’ve never set financial parameters for yourself and you’re not filthy rich; chances are that you need to take an honest inventory of your income, spending, and savings goals. This exercise can help you track not only what you’re buying, but also how and when.
You save less than five per cent
Those who want financial security during their retirement years must make sure that they aren’t among those who are spending more than they make. If you are saving less than five per cent of your gross income, you are likely in over your head. A savings rate below five per cent means you could be in real danger of financial ruin if someone in your family were to have a medical emergency or your need to carry out an impromptu project. Ideally, everyone should try to save as much as they can but in terms of targets, the rule most financial advisors suggest is 10 per cent of your gross income. Beginning at age 30, if you were to save 10 per cent of your N1, 000,000 annual income or N100,000 every year, and earn an annual rate of return of five per cent, that money would grow to more than N10,000,000 by the time you are 65.
You have no emergency fund
Part of the reason you need savings is to pay, in cash, for those inevitable emergency purchases like if your car has a major fault or you get hit with an excruciatingly high bill. Financing these kinds of expenses with a loan will only continue the cycle of living beyond what you can afford. Try to build an emergency fund of about N50, 000; that way, you at least have a cushion when an unexpected expense crops up. Try to do this within six months and set aside as much as possible each month towards the goal. This is not your total emergency fund. It is simply a place to start.
No money left at the end of the month
People who live on paycheck to paycheck often believe that they can’t save money or spend less because their lifestyle has become a habit. However, there are typically at least one or two small ways you can cut back; like trading a pricey cable bill for Netflix, which is cheaper and can be split among friends. An easy way to jump-start savings and become more conscious of your spending decisions is to enact a no-spend month. Allow yourself to spend money only on the bare necessities for 30 days —rent, bills, groceries— and cut out everything else. No clothes shopping, no eating out, and especially no online splurging. Nothing puts your finances in check more than a consumption detox.
Bills are spiraling out of control
Buying on credit and paying by installment has become a pastime. It’s much easier to buy a new flat screen TV when the salesman breaks down the price in monthly installments. The problem is that all of these bills start to add up and you end up nickel and diming yourself into bankruptcy. If your monthly income is being sliced and diced to pay for dozens of unnecessary installment purchases and services, you are likely in over your head. Lay out all of your monthly bills on your kitchen table and go through them one by one. Some of the best places to find savings include your telephone bills, utility bills (turn off the lights, don’t run the air conditioner if nobody is home) and your entertainment expenses (you could start to dine out less and pack lunch for work).