An average person in Dar es salaam spends 30% of his income on accommodation and 34% on commuting per month. That’s a whopping 64% of one’s total income gone before other basic needs! This, unfortunately, says a lot about our financial literacy, or the lack of it.
Several years ago I met a young woman who had just gotten her first employment and was contemplating getting a bank loan to purchase a vehicle. Dar’s traffic jams can be unforgiving, so I understood her motivation. I, instead, recommended that she gets a place close to where she was working. She didn’t take my advice and soon she began struggling to settle her rent.
Her mistake was due to financial illiteracy. A loan of 15m payable in five years costs around 8m in interest. Adding a depreciation rate of 20% pa and a total cost of ownership of about 10m in 5 years – that decision set her back by at least 33m! Had she chosen to pay 100,000 extra in rent, she could have saved at least 25m in future expenses.
This is one of the many reasons that people fail to save anything from their incomes. When they are struggling financially, they say they can’t save because they have nothing remaining. And when they have comfortable incomes that guarantee that something will always remain, they disillusion themselves into thinking that that make them good savers. That’s what I used to think of myself – a master saver – since I was putting aside more than 70% of my income every month. It took a dramatic change of my situation to realise that saving demanded a discipline which I didn’t have.
When a person has no targets, he cannot miss anything. They are not stretched at all by the choices they make. To them saving is an incidental act, following all other expenses. These are no savers. We need to establish an effective saving culture.
Here are the few time-honoured tips to get you started:
- Set a budget
Ever asked yourself ‘where did my money go’? When people are indulging themselves in shopping or gifting their drinking buddies with extra rounds of beers, it all feels wonderful. Then they wake up one day wondering how they managed to burn through all their dough. Very common.
Budgeting is necessary to help people figure out what their needs vs. wants are. People need to pay rent, bills, school fees, get food, etc. These are things one cannot do without. Wants are those things that make one’s life more comfortable. This may include – vehicles, travels, weekend outings, gym memberships, internet subscriptions, etc.
A disciplined saver chooses to delay his gratification. Do you really need those multiple digital subscriptions and those frequent pizza deliveries? A few lifestyle choices can help improve your financial outlook and set aside more.
2. Set goals for your savings
Experts usually advise people to save 10% of one’s income. This is a good place to start but, to be more effective, people need to know why they are saving. There are short term needs – say, paying for annual rent, purchasing a vehicle, or for that desired trip – or long-term needs – such as purchasing a house, children’s college fund, or retirement. Understanding why one is saving will help determine the discipline that one may have to endure to achieve that.
Another common goal is an emergency fund – that is, a saving account which will provide one with a safety net when there is a shock event in one’s life. Sometimes there are accidents, serious illnesses, job losses, etc. The common target here is about six months of one’s income. However, given our environment – we don’t have unemployment benefits and Medicare – we may need at least a year’s worth of one’s income to be safe.
3. Re-consider your expenses
Ideally, rent should not cost beyond 15% of one’s income. At 30% one is seriously overspending. Moreover, if you are living 25km away from the city centre and need to commute with your family every day, wouldn’t you be better off living in Kinondoni, Msasani or Magomeni instead? Review your choices to see if they are smart.
Some expenses are only fixed once you have committed to pay them. But, sometimes, as was the case in that young woman’s example, it is possible to live smartly and save more instead.
Unfortunately, few of us, if any, have had the privilege of learning how to manage our personal finances. The journey to financial literacy can be arduous and usually involves many costly trials and errors. That’s why, if you can afford it, it is advisable to consult a well-meaning personal finance or business advisor. Who knows, they might just have that experience which will catapult your investments or career forward.
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Writer’s name: Grace Makakala.