FINANCIAL INTELLIGENCE

Improving Your Personal Financial Health: Part 3

Published

2 months ago

November 19, 2020

Recognize Needs vs. Wants—and Spend Mindfully

I have noticed that a lot of people find it difficult to spend mindfully because they do not know how to really differentiate between needs and wants.One of the largest challenges to creating and managing a personal budget is understanding the difference between needs and wants.Spending money on wants is often the first thing I tell my clients to cut in my budgeting class.

However, the truth about wants spending is much more complicated and (more important to satisfaction) than any needs spending.First, let’s define financial needs and wants.

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Needs: Spending on goods or services required for basic survival without which an individual would die. Needs spending includes basic shelter, food, clothing, healthcare, etc.

Wants: Spending on goods or services that are not necessary for basic survival but that we desire or wish for. Examples of wants spending include dining out, going to the movies with friends, buying brand name vs. generic, etc. Unless you have an unlimited amount of money, it’s in your best interest to be mindful of the difference between “needs” and “wants,” so you can make better spending choices.

Needs on the other hand are things you have to have in order to survive: food, shelter, healthcare, transportation, a reasonable amount of clothing (many people include savings as a need, whether that’s a set 10% of their income or whatever they can afford to set aside each month). Conversely, wants are things you would like to have but don’t require for survival. It can be challenging to accurately label expenses as either needs or wants, and for many, the line gets blurred between the two.

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When this happens, it can be easy to rationalize away an unnecessary or extravagant purchase by calling it a need. A car is a good example. You need a car to get to work and take the kids to school. You want the luxury edition SUV that costs twice as much as a more practical car (and costs you more in gas). You could try and call the SUV a “need” because you do, in fact, need a car, but it’s still a want.

Any difference in price between a more economical vehicle and the luxury SUV is money that you didn’t have to spend. Your needs should get top priority in your personal budget. Only after your needs have been met should you allocate any discretionary income toward wants. And again, if you do have money left over each week or each month after paying for the things you really need, you don’t have to spend it all.

Let me leave you with four ways to strengthen your spending defense mechanisms:

Be realistic with your yourselfIt’s very difficult to limit spending to your most basic needs. There are many reasons why the “No-Spend Weekend” or “No-Spend Month” only span short amounts of time. A “No-Spend Year” would feel like a punishment to most people, and not a rewarding experiment that can unleash creative ways for rethinking your budget and spending patterns.One of the biggest mistakes you can make is being too strict with your budget. If your budget is too rigid, you’ll most likely not stick to it. If having a coffee or going out for dinner with a friend is important to you, make it part of your monthly expenses,but keep it reasonable. Stick to your spending plan and make sure your splurges are affordable.
Find the thrill in being frugal and thriftyMany people love the “thrill of the purchase” because they are not asking themselves, “Do I really need this?” before reaching for their credit card. Indeed, the self-inquiry normally comes after the purchase. “Why did I buy this?” Along with feelings of guilt and regret.However, it is totally possible, with a change in perspective, to find a better, longer lasting thrill in being “cheap and cheerful”. For some people, frugality and thriftiness must be learned.
Defer your pleasure purchasesPut things back and take some time to think about it. We often fall in love with particular items in the store. Sales people come over and deploy all sorts of strategies to help us make impulse decisions. “I’m going to shop around a bit. Thanks for showing me this. I might come back for it later” can be a polite way to get out of moments of shopping doubt. Never buy things that you aren’t fully committed to. If you are still thinking about something in a week’s time, maybe it’s meant to be! After a week or so, you may also have made the little sacrifices needed to afford it.
Keep the online shopping to a minimum in order to keep wants in check, be conscious of the society we live in. We are constantly bombarded with online marketing strategies that are designed to prey on our tendency to confuse needs vs. wants. This is especially the case when we are in front of our phones.Yes, online shopping can be dangerous. In two or three clicks you can be buying a brand new pair of shoes you don’t need.What happens if you have to pay for shipping to return them? You might just end up with something that never leaves your closet. Shopping apps? Deadly. Make your purchases an event that you have to plan for. And save for these things to avoid putting them on credit.Start today to create a future you desire.

My upcoming book will open your eyes to so many traps and how to avoid them. However, I hope you got value from today’s episode.

Till I come your way with another tip next week. I remain my humble self, your finance coach.

This post was originally shared in our Facebook Group: Money Mathematician Network

Temi Alade-Mustapha.

FINANCIAL INTELLIGENCE

Improving Your Personal Financial Health: Part 2

Published

2 months ago

November 12, 2020

Temi Alade Mustapha

I started this series last week, where I gave the first point; “ Do the math- Net worth and Personal budget” You may need to go through this page to read it again. The second point I will be sharing with us today is:

Recognize and Manage Lifestyle Inflation.

Most individuals will spend more money if they have more money to spend. As people advance in their careers and earn higher salaries, there tends to be a corresponding increase in spending, a phenomenon known as “lifestyle inflation.” Even though you might be able to pay your bills, lifestyle inflation can be damaging in the long run, because it limits your ability to build wealth.

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Every extra dollar you spend now means less money later and during retirement. One of the main reasons people allow lifestyle inflation to sabotage their finances is their desire to keep up with what is in vogue. It’s not uncommon for people to feel the need to match their friends’ and coworkers’ spending habits. If your peers drive exotic cars, vacation at exclusive resorts, and dine at expensive restaurants, you might feel pressured to do the same.

What is easy to overlook is that in many cases these friends may be servicing a lot of debt to maintain their wealthy appearance. Despite their wealthy “glow”—the fancy cars, the expensive vacations, the private schools for the kids—they might be living paycheck to paycheck and not saving a dime for retirement. As your professional and personal situation evolves over time, some increases in spending are natural.

You might need to upgrade your wardrobe to dress appropriately for a new position, or, as your family grows, you might need a house with more bedrooms. And with more responsibilities at work, you might find that it makes sense to hire someone to mow the lawn or clean the house, freeing up time to spend with family and friends and improving your quality of life. Lifestyle inflation can easily derail your long term goals.

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The trap of short term gratification in the form of luxury convenience can delay your plans to get out of debt or distrust your retirement plans.

Let me leave you with 7 ways you can control lifestyle inflation:

Be aware of your spending choices.
Do the math of your raise.
Treat yourself – within reason.
Set aside a percentage of your income for splurging.
Add big changes to your budget gradually.
Find friends with the same goals.
Set up automatic savings.

Till next week…Start today to create the future you desire.

This posted was originally posted in our Facebook Group: Money Mathematician Network

Temi Alade- MustaphaAuthor Money Maths.

FINANCIAL INTELLIGENCE

Improving Your Personal Financial Health: Part 1

Published

3 months ago

November 5, 2020

Temi Alade Mustapha

Personal finance is how you manage your money and plan for your future. All of your financial decisions and activities have an effect on your financial health. Every Thursday this month of October, I will be sharing with us what to do to be financially healthy.

Do the Math—Net Worth and Personal Budgets

Money comes in, money goes out. For many people, this is about as deep as their understanding gets when it comes to personal finances. Rather than ignoring your finances and leaving them to chance, a bit of calculation can help you evaluate your current financial health and determine how to reach your short- and long-term financial goals.

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As a starting point, it is important to calculate your net worth – the difference between what you own and what you owe. To calculate your net worth, start by making a list of your assets (what you own) and your liabilities (what you owe). Then subtract the liabilities from the assets to arrive at your net-worth figure. Your net worth represents where you are financially at that moment, and it is normal for the figure to fluctuate over time.

Calculating your net worth one time can be helpful, but the real value comes from making this calculation on a regular basis (at least twice in a year). Tracking your net worth over time allows you to evaluate your progress, highlight your successes, and identify areas requiring improvement.

Equally important is developing a personal budget or spending plan. Created on a monthly or an annual basis, a personal budget is an important financial tool because it can help you:

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Plan for expenses
Reduce or eliminate expenses
Save for future goals
Spend wisely
Plan for emergencies
Prioritize spending and saving

Once you’ve made the appropriate projections, subtract your expenses from your income. If you have money left over, you have a surplus, and you can decide how to spend, save, or invest the money. If your expenses exceed your income, however, you will have to adjust your budget by increasing your income, getting another source of income, or by reducing your expenses.

To really understand where you are financially, and to figure out how to get where you want to be, do the math: Calculate both your net worth and a personal budget on a regular basis. This may seem abundantly obvious to some, but people’s failure to layout and stick to a detailed budget is the root cause of excessive spending and overwhelming debt.

Most people who make more money end up spending more money, a potentially dangerous phenomenon known as “lifestyle inflation.”

This post was first posted in our Facebook Group: Money Mathematician Network

Till next week…Start today to create the future you desire.

Temi Alade- Mustapha.

Your Finance Coach.

FINANCIAL INTELLIGENCE

Know Your Stocks: 2

Published

3 months ago

October 22, 2020

donald

Last time Ruramai and I shared with you the types of stocks available. We promised we would come back with a second edition to increase your knowledge of stocks. Take your time and go through this article, your knowledge of stocks will never be the same.

Growth Stocks

Growth stocks are stocks whose price is rapidly appreciating. It is the stock of a company that generates substantial and sustainable cash flows and whose revenue and earnings are expected to increase at a faster rate than an average company in the same industry. These are companies and industries whose products are always increasing in demand, the likes of education, telecommunications, and technology. Having an edge over the market (competitive advantage), companies that have new product inventions, discovered new markets, and patent rights, stocks of these companies tend to be growth stocks. Growth stocks provide gains to investors in the long run at a higher risk due to price volatility.

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Investors seeking to create wealth can invest in high growth stocks but should expect to realize gains in the long run. High growth shares usually depend on the company’s innovation thus companies that are innovative tend to have high growth rate. Typical growth stock companies retain most of their earning hence they do not pay a dividend, if they do pay it is usually small because the companies are working on expansion opportunities. Young investors should invest in growth stocks since the value of the stock increases overtime.

Penny Stocks

These are also known as small cap stocks or micro-cap stocks and they are usually associated with the small companies.Market capitalisation is how the market values a company,it is the price of the stock multiplied with the number of shares of that particular company.The common definition of small caps would be any stock that trades for less than US$5 according to the U.S Securities Exchange Commission (SEC). This definition however does not cater for other exchanges as prices differ from exchange to exchange. On the Zimbabwe Stock Exchange (ZSE) they have the small cap index which generally caters for these penny stocks. Using the current exchange rate all companies on the ZSE are currently trading for less than US$5, but this does not mean all stocks are penny stocks. This is why there is a small cap index on the ZSE to cater for the penny stocks on this exchange.

Penny stocks have a high level of volatility that means investors with a high level of risk tolerance are attracted by them. There is a very high potential of good returns from penny stocks as well as a high risk of losing an investment. Penny stocks are a high-risk investment option but at the same time the trading volumes are significantly lower.Since these are small companies there is a very high chance of the stock price going up and also a very high chance of the companies failing. Penny stocks have to be traded with caution otherwise if you’re only attracted by their low price without doing your research, you might end up losing your investments. These stocks are highly illiquid in the short term so it is profitable to invest in them for the long term. In this case the saying, the bigger the risk the bigger the return is not entirely true, always have a balanced portfolio so that a setback in penny stocks for example will be absorbed by a blue-chip stock.

Dividend Stocks

These are stocks that regularly pay out dividends to investors, the companies are usually well established with a good record of distributing their earnings back to their shareholders. These companies are usually well managed because the company knows it has to pay dividends to its investors quite often throughout the year. The stock prices of these companies do not really provide much room for percentage gains but they are stable as compared to those of other companies.

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Investors benefit from dividends as it is money in hand whilst they still hold on to the stocks they currently own. Investors that need a regular cash flow, pensioners and unemployed investors make the bulk of investors in dividend stocks. However, since the profits are being used to pay dividends, this means there is less money going into the growth and expansion of the company. Companies that are growing and expanding means the stock price will also appreciate over time.

Conclusion

Now that as an investor you know the types of stocks, your goal is to now select the stocks that satisfy your investment hunger. Make sure to choose the stocks that are aligned with your goals. If you can’t do that alone meet up with your financial adviser, at least now you understand the language when they speak. Always remember to keep a balanced portfolio when you invest, too much of a certain type of stock will do more harm the good if things do not go your way.