This week, we’re switching things up at The Red Notebook. After laying a foundation on habits, goals and lessons on the philosophy of personal growth and learning, we want to start sharing specific themes every other week that directly address areas in our business and personal lives that we wish we could have done better. And this week, we’re kicking it off with the big one: finance! We’ll explore both personal finance business finance and talk to one or two entrepreneurs and/or financial advisors to get their perspectives on finance.
Sponsor shoutout: our series on finance is sponsored by Eversend, an ebanking and money transfer app that’s disrupting the African banking industry. Use Eversend to quickly send money across Africa. Get Eversend from the Apple Store and Android App Store.
So, to kick things off, I wanted to share with you some lessons I’ve learnt personally – either through painful experience – or picked up from people and advisors I interact with frequently. The ability to implement some of these lessons will depend on where you are with your finances and earning capacity, but no matter the stage you’re at, there are some financial disciplines and principles that should be religiously followed from day one.
1. Don’t Do Everything At Once
This list is long, and like everything in life, it can be overwhelming to think of all the things you need to do and plan for. You don’t have to do everything in this list at once, but you should build the capacity to eventually do everything on the list. It takes time and you have to be patient, but implement one or two suggestions at a time and work your way to doing as much as possible over time. Financial discipline is a long-term game, and you have to balance this with your ability to meet your goals. Be patient, but be committed.
2. Pay Yourself First
Paying yourself first is not about paying yourself a salary or a wage first (that’s another issue I’ll highlight in the business version of this article). “Pay yourself first” simply means taking care of future you first, by putting your savings, investments and retirements first. These “expenses” should be prioritized over others. Most of the things we spend on fall under two main categories: i) mandatory expenses like bills, rent, food, school fees, etc. and ii) non-mandatory expenses like travel, leisure activities, or “nice things”. By putting your savings, investments and retirement payments in the first category, you avoid struggling to find money to save at the end of the month.
3. Do Not Spend More Than You Earn
This should be number one, because of how often it’s abused (and yes, I used to fail miserably at this in my younger days). Quite simply, live within your means. Do not rent a house you cannot afford to pay for. Do not buy a car your paycheck cannot maintain. Do not buy things you simply want, but don’t need. Prioritize your expenses according to your current earnings, not the earnings in your hopes and dreams. Draw up a budget for your current earnings and expenses, and ensure you include an automatic 10% on savings (no matter how small your earnings), and make sure your expenses do not exceed your earnings. If they do, reduce your expenses (which might require some tough sacrifices) or find ways to increase your earnings (more on that later).
4. Save For Emergencies
Life is chaos, and all sorts of unpredictable things will happen to all of us, at various stages in life. Emergencies will happen with health, family, natural disasters, etc. Learn to put aside separate emergency savings to specifically and only be used for such eventualities. Build it out slowly, and only use it for actual emergencies. A lot of the things that look like emergencies eventually sort themselves out, so categorize clearly what would be considered a true emergency, and be very strict about this.
5. Learn About Investing Early
From the very beginning, learn about investing your money as early as you can. And always invest in projects or ideas that you understand well, or ideas whose return on investment you understand well enough to evaluate the profitability of your investment.
6. Invest With Multiple Layers Of Risk
First things first, all investments carry a level of risk. There is no investment that is 100% guaranteed to be safe, but some come very close, like government bonds. Generally, the safer the investment, the lower the returns (or profit), and the higher the risk of the investment, the higher the potential returns on your investment. Plan your investments according to your risk appetite (how much risk you’re willing to take) and how much money you can afford to put into an investment. The higher the risk of the investment, the higher the chances of losing your money. For long-term investment like retirement or education for your children, focus on long-term, low-risk investments.
7. Start A Long-term Savings Account And Put It On Auto Pilot
A long-term savings plans is designed to help you slowly build savings and wealth over a long period (maybe 10 to 50 years), and you should find a way to automatically deduct it from your account, either by having it deducted by your bank automatically and transferred into another account or by physically putting it aside yourself (see item 2). Social Security Funds generally do this for retirement purposes, but you should find a way to create a separate, additional automated savings process that’s on autopilot.
8. Assume You’ll Have To Take Care Of Your Family
African tax is a real thing, not just because it’s what society expects of us, but because we’re generally a more community-focused people. The more successful of us take care of the less successful, especially those back in the villages, and the older ones take care of the younger ones. It gets even more complex when we have extended families that depend on us for upkeep. It’s never easy, nor convenient, but the earlier you prepare for it, the easier it becomes.
9. Teach Your Kids Early About Money
I’ve learnt this by watching different families that I respect, and from the memories of how my own parents raised me. Children who are taught early about money – especially those who see how it is earned, budgeted and spent – are more likely to have a healthy respect for saving and spending their parents’ money and will generally be more disciplined when it comes to their own finances. This is especially useful if you have a family business that is a significant revenue stream for your household; taking your children through the business operations is a great way to teach them about money.
10. What You Want Is Not What You Need
I’d like to think that this is pretty obvious, but it’s never as simple as we think. You must cultivate the ability to distinguish between what you need and what you want and be rigorously disciplined about prioritizing the needs over the wants. Needs are things that you absolutely… well, need to spend money on while your wants are simply things you desire, but not having them wouldn’t have a significant impact on your life. It’s very easy to rationalize and explain how important your wants are and sneak them into the needs category. Learn to be very clear about the differences and prioritize your expenses accordingly.
11. Financial Planning Isn’t Just For Rich People
We often think that financial planning and financial advise is only for people who have the money to spare. But the truth is, financial planning is best started when you don’t have the money to spare, because that’s the plan that will get you to being rich or wealthy, but also, the discipline you develop from the very beginning will help you when you start earning more money. And that is when you will need the discipline the most. We’ve all heard stories of people who were super wealthy or got lucky, but failed to manage or plan their finances well enough and eventually became broke. You need financial planning at every stage of your financial life.
12. Don’t Compare Yourself To Others
We all walk different journeys in our lives. And while it can be a great boost or inspiration to aspire to be like someone you admire, constantly comparing yourself to other people will have negative impact on your financial life. Instead focus on your goals and constantly improve your ability to earn and save more money.
13. Constantly Increase Your Ability To Earn
We generally earn money in three ways: first, by getting paid directly for our time or effort on an hourly or monthly basis; secondly, by providing a product or service that we can sell to lots of people at the same time. For the first option, we can earn more money by increasing how much our time is worth, which generally means becoming more skilled and by extension, more valuable. This may take the form of more education, more time spent in an industry or career or by becoming an expert in a specific industry. For the second option, we can earn more money by increasing the number of people we offer our products and services to (through sales, marketing, etc.). But without going into detail, your focus should always be on finding ways to leverage your current money to eventually earn you more money.
14. Start Building Multiple Streams Of Income Early
Building on the point above, on top of finding ways in which you can directly earn more money, you should build additional profitable streams of income. And each stream of income should supplement the previous stream, not overwhelm, unless the new stream proves to be significantly more profitable that the previous stream. This is an important disclaimer because many people jeopardize their primary stream of income (like their primary job) by getting distracted with side-gigs and side-hustles. The ideal scenario would be an additional stream of income that doesn’t need your direct input or one that you can do during your free time (weekends, for example). The more independent streams of income you have, the more money you have to build a stronger financial future.
15. Avoid Debt
This is both easy and complex. It’s easy because it’s straightforward: avoid borrowing money as much as possible, especially for high-risk purposes or non-emergencies. It’s complex because sometimes we need money for something critical, or a business idea that could have strong potential. But generally, try as much as you possibly can to avoid any form of debt, unless that debt will earn you more money than it will cost. Not all debt is bad, but in most cases, debt can be financially crippling and can leave you struggling for a very, very long time.
16. Understand Financial Compounding And Leverage It
This should also be number one, simply because we grossly underestimate how powerful compounding is. Simply put, compounding meanings re-investing your profit or earnings back into the same investment to earn more money. It can take a while to gain momentum, and can look slow at the beginning, but its results are truly breathtaking. Consider these three simple examples and notice how start the end result is:
Example 1: Annual saving, no compounding.
Janet saves 1,000,000 per year for 20 years, with no interest earned on the savings. At the end of 20 years, Janet has 20,000,000 UGX.
Example 2: One-time saving, with compounded interest
Janet has 1,000,000 and puts it in an account that earns 10% interest per year for 20 years. She doesn’t add any more money to the account, but keeps leaving the interest in the account (compounding). At the end of the 20 years, Janet has 6,727,000 UGX.
Example 3: Annual saving with compounded interest
Janet saves 1,000,000 per year for 20 years, and puts it in an account that earns 10% per year. She compounds each year by leaving the annual interest in the account, but is adding an additional 1,000,000 into the account. At the end of 20 years, Janet has 69,700,000 UGX.
This is a pretty significant difference in return on investment. But to illustrate the point further, if Janet found a bank/investment that gives her just 1% extra (to make 11% interest per year), after 20 years, she’ll have 79,300,000 UGX!
17. Understand Time And Patience
It’s said that most people overestimate what they can do in 1 year and underestimate what they can do in 10 years. Similarly, we overestimate what we can save or earn in 1 year and underestimate what we can earn or save in 10 years with patience and commitment to growth of personal earning capacity and additional revenue streams. Good financial habits take time and discipline to build. Pace yourself, look at the big picture, break down your goals into 10-year, 5-year, 2-year, annual, and monthly (manageable) goals and you’ll be unstoppable.
18. Get Health Insurance As Early As You Can
Health insurance (and insurance generally) is one of those things that you think you’ll never need, or believe can wait until “you can afford to” but when you need it, it often becomes extremely critical. Healthcare can become very expensive and life-threatening without health insurance. Many employers provide health insurance, and some insurance companies allow individuals, families or groups of people to sign up for health insurance plans. So, as soon as you’re able, get health insurance and use it to get checked up frequently, not just when you’re sick.
19. Children Are (Very) Expensive, So Plan Accordingly
No personal experience here, but from the conversations I’ve had with my peers and elders who’ve had kids, it’s really expensive having a child. Right from birth to adulthood, almost everything on the expense list for children is a mandatory expense. Many parents have lamented how their own lives and priorities disappear once they have kids. For some, it’s a blessing, and for others, an unforeseen burden. Plan well in advance for the possibility of having children and secure their future by setting aside funds for critical things like education and healthcare. “We’ll see.” is not a good plan. Just saying.
20. There’s No Quick Money.
Don’t chase instant wealth dreams or you’ll lose money (and time) chasing those dreams and it will end in tears. You know the ones I’m talking about: “There’s a deal here.” “We just need to clear this thing from the border.” “If you buy X and convince five friends to buy X and they also…” Build the discipline, invest in yourself, your skills and your own assets and be patient with finances. 10 years fly by faster than you imagine, and the regret of wishing you’d started 10 years ago is painful, especially if you truly haven’t learnt your lessons well!
I hope this was helpful. We’d love to hear your own lessons from your experiences or any other tips or feedback you may have. Please share your thoughts and lessons here in the comments, or on social media using the hashtag #RedNotebookFinance
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