Some words of comfort: This issue of the Access Wealth Blog is not about scrimping and saving and living like a pauper. You work hard, and must enjoy life. However, by getting to grips with your spending you will enjoy more utility for your money. You will plan and achieve your short and long term goals, which might include a luxury holiday, a new phone, and should include a comfortable retirement.
Even if you’re rolling in it, financial advisors everywhere will encourage you to record your expenses as though you are short on money. Whether you are keeping receipts and logging them into a spreadsheet, or using an app on your phone to track your expenses in real time (see the next issue for advice on this), a full picture of your costs is a vital first step to take if you are going to create wealth in the long term.
Once you’ve established how best to record your expenses, it’s time to plan your spending. The most widely recommended ratio is the 30:20:50 plan. It breaks your income up into the three broadest categories of expenditure: Housing (30%); Savings and Debts (20%) and Everything Else (50%).
Hopefully, if you are like most Zimbabweans, you have not accumulated too much debt. The average American household has a whopping $16,000 of credit card debt – a situation created by a strong credit culture in the country. Zimbabweans by contrast have never had sustained access to large loans, department store credit, or car financing plans, and wholesale borrowing is low. “We eat what we kill,” one might say. However, where credit is available, it can be leveraged to form part of a smart wealth creation strategy. This will be discussed in future blogs.
On the accommodation front, housing prices are extremely varied across the world but 30% of your income is the absolute most you should pay on a mortgage, with rentals hopefully falling below this figure. If you have lots of debt, cheaper accommodation is a good way to get back in the black.
Where things a bit more complicated is the 50% of your income allocated to your flexible spending. Good record keeping in this category will make or break your financial plans. Within this category you should create your own sub groups such as food, transport, groceries, school fees etc. Here is where a personal budget will really start to fit your individual situation, with single people allocating a higher percentage to entertainment than breadwinners for large families for example.
If you’ve never run a personal budget, start the journey to financial control by listing all your expenses very specifically. Maybe record all your day to day expenses for a week or two to act as a guideline, and then weigh your actual expenditure against the recommended 30:20:50 ratio.
Many people who don’t normally run personal budgets will not know that their Other Expenses category is much higher than the recommended 50%, eating away into savings and debt repayment. It might be time to trim some of your luxury items. More on how to save money in future issues.
For now, just make a start with an expenses log. Getting good at this is a process, not an event. Just seeing the high totals spent on ‘small’ items might prompt you to change your habits and only buy indulgences that are budgeted for. Put a coloured card in your wallet to remind you to keep notes as you pay for stuff. Take photos of your receipts to record later. Or use an app. But the first step is to diligently start recording and push yourself to do so until it’s second nature. How you spend your money is up to you, but knowing how you are spending it will almost always change your priorities.
One aspect that Zimbabweans abroad have to factor in on top of this is sending money home. Be it investments, family support, or maybe just a gift, you have to work out which part of 30:20:50 to list them under. The good news is that Access Finance can help you get as little as $100 home securely and instantly in US dollars. Check out our locations and fees here.
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