The subject of money is one that most people often avoid, and unfortunately, it is not taught in school. Many people spend tens of hours every week and throughout the month working to earn money. Yet their bank accounts, wallets, or purses are almost empty by the end of the month. The reason for this could be that either they are not earning enough money to satisfy their need or wants, or they are unable to manage or control the outflow of money. To be effective in money management and wealth creation, we must be disciplined and equip ourselves with knowledge about financial management. Let’s discuss some valuable money management tips below.
1. We should never rely on one source of income. Our needs and wants keep growing (increasing) over time because of the increase in the prices of goods and services, increase in family and other social responsibilities. Unfortunately, for some people, their salaries do not match the increase in their responsibilities, making them live from hand to mouth. For such persons, they could engage in a part-time activity that could give them extra income. It could be a part-time job, a business, or any other side hustle that could enable them to earn an income no matter how small it is. If at some point, the business or side hustle that they are engaged in could enable them to earn more income than in a full-time job, they could quit the full-time job and engage full-time on their business or side hustle. One of the interesting things is that one can enter into business partnerships with other people and earn money from those businesses. One could earn income from buying or building a property (e.g, house, land, machine etc.) and renting it out, creating intellectual property and receiving royalty payments from those using it, profit from buying and selling, dividend from owning a stock of a company, receiving interest from loaning money to individuals or from keeping money in interest yielding saving accounts. If the needs and wants keep growing, but the income remains fixed, one will soon have to borrow to meet some of those needs or wants and soon enter into the poverty or debt trap.
2. We should save at least 10% of our income. Saving money enables one to accumulate money that he or she can use to meet future emergencies (e.g., health care, education) or to invest in creating other sources of income. For people who earn very little, saving money becomes very difficult. For some people, they have to pay the house rent (which takes a significant amount of their income), they have to buy food, they have to pay for transportation, they have to buy internet data and have to give school allowance to their children. Managing monthly expenses in such a way as having a money surplus of at least 10% of their income is difficult. One of the ways to get around this is to make some trade-offs when choosing where to rent, and the size of house rent is important to reduce expenses. They should also make some compromise when it comes to their appetite for food whilst ensuring that they feed properly to avoid ill-health (not overspending). The rule of thumb is to save at least 10% of our income; it should not be less than 10%. We should pay ourselves first.
3. We should never put our money in a business or investment that we do not understand. Many men and women often lose money because they invest their money in businesses or investments that they do not understand. Their desire to earn high (and unreasonable) returns on their investments push them to invest in businesses they believe will yield more income within a short time regardless of the risks involved. They are often victims of Ponzi schemes, where they are persuaded to "invest" their money, persuade others to join the scheme, and they will earn money throughout their lifetime while doing nothing. Creators of Ponzi schemes often take part of the money "invested" by newcomers to pay those who had joined the scheme early and then keep the rest for themselves. In an actual sense putting money in a Ponzi scheme is not an investment because no wealth is actually created, and when people (whom they call investors) stop joining the scheme, they are unable to fulfil their promise (payment obligations) to the old "investors" and the scheme crashes. When the scheme crashes, the "investors" lose their money while the scheme's creators vanish with the rest of the money. It has happened many times and in different places, but people keep falling prey to Ponzi schemes. The worst place where we should never attempt to earn money is at the gambling table. More money is lost at the gambling table, and the owner of the gambling table has arranged the game in his favour (to make sure that we lose our money) to make his business sustainable.
4. We should never go broke trying to impress others. Many people spend a lot of money on luxuries (expensive clothes, shoes, cars, phones) to impress others. Some parents borrow money to put their children in very expensive schools to impress their children and friends. The desire to impress our loved ones and the public is vicious, and it grows like a monster and eventually turns us into spenders (people who spend money in extravagant, irresponsible ways). Such persons sometimes struggle financially throughout their lifetime, and if they are not careful, they eventually enter into the debt trap.
5. We should avoid bad debt at all costs. Bad debt is money borrowed for consumption instead of investing unless in the case of a health emergency or any other life-threatening emergency. We should strive to cut down expenditure and create other sources of income by putting money in reliable investments, businesses or other side hustles. The bottom line is to ensure that the expenses never grow above the income; it is a dangerous circumstance. Working men and women always desire to create financial protection for themselves and their families. Learning about personal finance management is essential.
6. We should never increase our expenses with income. To manage money effectively, we should be able to differentiate between our needs and our wants. Our needs are necessities, which are the things that we must have (e.g., house, food, water, clothes, shoes, car, internet connection) to live a satisfactory life. Our wants are what we desire to have, but we could still live a satisfactory life without those things. For example, one could desire to have the latest iPhone, but he or she could still have satisfactory communication and surfing experience with a cheaper phone. When a person always spends all the income he or she receives and always raises his or her expenses to match up the increase in income, then he or she has entered the "Rat Race". A man or woman trapped in the "Rat Race" eventually retires with nothing in the bank, no assets, sometimes with debts to pay, and unable to provide for his or her family.
7. We should develop the right attitude and mindset towards money. The majority of people believe that money is evil and that anyone who desires money is evil. Therefore, they never spend time learning how to manage money and use it as a tool for wealth creation. They pay less attention to the subject of money, yet they need money to satisfy their needs and to take care of life emergencies (health and education). However, a few believe that money can be used for good, like supporting the education of the children whose parents cannot meet their school needs, offering financial support for the health of people with modest means, and supporting other courses to advance society. These people study how money works, how to manage money to have enough for their families and society, and how to use it as a tool for wealth creation. Only men and women use the money for evil purposes, but money in itself is a harmless material (in the case of physical money) or a figure in a database (in the case of money in a bank or mobile money account). Money was invented to facilitate cooperation and exchange of goods and services between individuals and store value over time and space. Therefore, understanding how money works and developing a positive attitude towards money is very important.
8. We should create assets and strive to reduce our liabilities. In this context, we will consider the definition of assets given by Robert Kyosaki, the author of "Rich Dad Poor Dad". He defined an asset as anything that yields income (add money to our account or wallet), while a liability increases our debt or induces us to spend money (takes money out of our account or wallet). If a man or woman builds or buys a house and puts it for rent, that house is an asset as he earns income from the rent; otherwise, it is a liability because he has to spend for the maintenance of the house (and sometimes pay property tax to the government). The same thing is true for a car. It is important to understand the difference between an asset and a liability when making financial decisions. If a man or woman must buy a second car, he or she should make sure that he or she has a second house (farmland, machinery) that he or she is renting out to others or at least should own a business or any other form of investments. The personal development coach Jim Rhon put it as follows: "Don't buy a second car until you've bought the second house. It is not cars that make you rich; it's real estate that makes you rich".
9. We should strive to own a home to live comfortably and buy a piece of land to grow some crops or keep some animals for food. For most people, more than 50% of their income is spent on house rent and food, and therefore, owning a home, and a plot of land to produce some food could be essential where possible. For people having a steady source of income, they could sign a loan contract with a financial institution to finance the process of buying a plot of land and of building the house (or buying a house) and then they will pay over a given period by automatic deduction from the income. Instead of waiting to accumulate enough money to buy a house, it is better to take a normal loan (or a mortgage) and then pay over time. When we accumulate money in our bank account, the value of the money goes down over time due to inflation and the prices of land, building materials, and construction labour increase. It means that the purchasing power of money drops, and if 3500 frs (6 dollars) could buy a bag of cement, that same amount of money can no longer buy a bag of cement. When we own a house and a plot of land to produce some food, it reduces our financial burden in the long run and enables us to create wealth.
10. We should subscribe to a health insurance program to ensure that in times of health emergency, part or all of the financial bills for a proper health care service are covered without incurring debt. It is important to ensure that we can pay for health care services without incurring much debt, although it is quite difficult for low-income earners to pay for health insurance as they spend all they earn to meet basic needs. There is a cheap health insurance scheme run by the Catholic church called BEPHA (Bamenda Ecclesiastical Province Health Assistance) which is linked to most health facilities across the country. With a yearly payment of 5000 frs, they can cover some health care services. Many people often incur debt or sell valuable assets at a lower price to cover health bills that could be covered in part or in full by an appropriate health insurance scheme.
11. We should never stop learning and investing in ourselves. Even though we have to deal with money throughout our lifetime, financial education is given little or no attention. Some people acquire and apply sound financial principles and disciplines unconsciously to create wealth and grow financially. Meanwhile, the majority of people drift throughout life earning and spending money and eventually retire without assets. Some schools have adopted financial education as part of their curriculum, and some parents are struggling to teach their children about money. Jewish parents teach their children basic financial management when they are still young, and it could account for the fact that Jews have been disproportionately wealthy throughout history and various countries where they have settled. It justifies the rapid growth and property of the state of Israel which started very poor and became more developed than most parts of Europe. Recently, 25 states in the United States of America (USA) proposed legislation to make financial education compulsory in the school system. The European Union is making much effort to promote financial education in Europe, and the African countries could adopt a similar approach. In the end, our financial education should be our responsibility.
One of the reasons most people struggle throughout their lifetime is that they ignore assets and focus their attention on money. If a man or woman is keen enough to see how the value of money has dropped with the continuous spike in inflation, he or she will not only focus on money and spend thoughtlessly. We have to create more value in the marketplace and serve more people in order to earn more money. We have to keep striving to create assets (businesses or investments) that bring more income or grow in value and then keep our wants (the things we desire) under control. We should not get fooled by our appetite and desires. Delayed gratification is essential.
By Godlove Suila Kuaban
