1. Assess your current situation: I think this is the first step on the journey to financial freedom. Who are you? What is your current income? Do you struggle to meet your monthly expenses? How long can you last without any income? This is like a health check on your finances. Give your finances a random score out of 10, and trust me, you will probably be right. Knowing where you are, is always a good place to start your financial fitness journey. A good exercise to start with is to calculate your net worth. You can calculate your net worth in these three (3) simple steps:
Step 1 - Sum up all your total assets (cash in the bank, stocks, bonds, car, home, land, etc.).
Step 2 - Sum up all your total liabilities (credit card debt, car loans, personal loans, outstanding mortgage, etc.)
Step 3 - Subtract your total liabilities from your total assets.
Your Net Worth = Total Assets - Total Liabilities.
Don't feel bad if the sum is negative, just continue reading. If it is positive, see how it can get even better.
2. Draw up a budget: The lack of a budget is one of the main reasons for poor finances. I know people that earn decent salaries but still struggling to meet their monthly expenses. A budget helps you make necessary adjustments before you earn any money. This way, you can think through your decisions thoroughly, make virtual purchases, and return them before a dime leaves your account. There are many budget tools you can find online but a budget could be as simple as writing down your income and expenses on a piece of paper and making all necessary adjustments. I usually like to leave some room for contingencies to ensure that I can treat myself to some fine dining or a little bit of charity when required.
3. Cut your expenses: Now that you have a budget. Can you see where your money is going? Cut it now! Is your rent too high? What about your child's school fees? Are you thinking of a second, third, or fourth child? You have to be deliberate with financial decisions. Are you spending too much on lunch at work or trying to impress too many girls? Living within your means is the only way you can build any substantial savings. You cannot live the champagne life on a coke budget.
4. Prioritize expensive debt: If you have no debt, good for you. (It is common to have no debt many African countries). But if you do, now will be a time to fast track payments. It does not make any sense to be paying expensive debt while building your savings. That is because the interest on loans is usually much higher than what you can earn on any safe investments. For instance, credit cards cost somewhere between 25% - 36% in interest per annum. You need to come up with an accelerated plan to get out of unproductive debt as soon as possible.
5. Start small: One of the main excuses that people who have no savings give, is that they earn too little. That is an excuse that you have to do away with. Life indeed happens. You may not have that dream job yet or your business may be going through a rough patch, but building a savings habit is a mindset thing. I know people that earn very little money and still manage to save. Spending more than you earn means you have to make some lifestyle changes, and you have to start now. A question that I usually ask people is: How much can you save without making any significant adjustments? Do you have an answer to that? Yes, Start saving that monthly.
6. Set up a debit order: Now that you know how much that you can save without dying, it is time to open a savings account and set up a direct debit instruction. Make sure you have no access to this account if you don't trust yourself. A savings account can earn up to 4% per annum. Do not be perturbed about the returns as consistency is the most important element at this stage. Do this for 3 months and make a balance inquiry at the bank. Now smile 😊.
7. Grow your income: This is one trick many people miss. Wouldn't you rather have $1million instead of a $100k? Now think hard, and ask yourself, how can you raise your income. Can you ask for a pay raise, what about a side hustle? Do you have any bulk cash sitting somewhere and earning zero? Growing your income gives you more options and must be considered at every point.
8. Get Insurance: Too many people in this part of the world think insurance is an additional expense that can be overlooked, only to find themselves in a serious financial mess due to an unforeseen event. So get the right things insured. Health insurance, car insurance, fire, and burglary insurance for your business. This will ensure that an out of budget expense like a car accident or child falling sick does not derail your savings plan.
9. Get married or get a roommate: I know a lot of people will not agree with this, but getting married can significantly reduce your expenses if you and your spouse are both chipping in. You can share significant expenses like rent, school fees, or even a car if you work beside each other. You can also consider getting a roommate if you are young and single.
10. Invest: Now you that you have been able to build up some change in your savings account. It is time to start investing. Make sure your money never sleeps. Make inquiries about money markets, learn about buying stocks, read some personal finance books, and talk to a professional. Being able to invest is one of the perks of savings and investing will help you build lasting wealth as your money begins to work for you.
I hope you have been able to get a tip or two from this list and you can find the discipline to start your financial fitness journey too. I will be sharing some tips on good investments in future articles. See you soon.
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