My last three months have gone into heavy travelling in the Middle East and gave me another opportunity of meeting a number of people from different backgrounds. I had quite a few meetings related to advising and coaching individuals and families, and one thing that I have noticed is that the majority of the people are worried because of an uncertain financial future. Some of them have lost their jobs, some are on the verge of losing their jobs, companies are shrinking their workforce and operations, and many people are looking for advice on how to manage such a situation.
The world’s struggling economy, oil and housing crisis, continuous wars in the Middle East, and credit crunch have undeniably impacted millions of people. The complex nature of turbulent capitalistic economy leaves many people feeling confused and powerless.
While it’s important for us to understand the system and how it works, it is even more important for us to empower ourselves to take good care of our personal economies – our monthly income, expenses, and investments. I am just going to share some of my thoughts on managing personal economies.
The only thing that you can control is your budget and expenses. The task is not always easy, but the basic fundamentals of smart money management still apply no matter how confusing things get at the macro level.
Changing your spending habits are the first and maybe the most difficult undertaking your family will face while trying to survive the financial crisis. Living as though nothing has changed is the number one mistake people make during challenging times and can lead to seemingly insuperable debt.
Keeping yourself financially stable is a continuous struggle.
Following are the six simple steps that you can think of applying to manage yourself better financially.
- Redefine your spending
Many people underestimate the bad money habits that can eventually take over their finances. We often don’t wise up to our habits until they’ve become hard to manage. If your income has dropped, your spending must also. Your family may need to forgo some traditions like eating out on weekends, or Sunday outings to expensive places or meaningless parties with friends, until your financial situation changes.
- Little changes count.
Even small changes will have an impact, and more importantly, will set the stage for changing your habits. Your family will be stronger financially in the long run, and once you get on the right track, you can begin saving for something big (like a vacation, or new car, or a better home etc.).
- Be a smart shopper
Always shop with a list and take cash so that you can’t overspend. Do not give liberty of spending (especially credit card) to your family. Purchase only absolutely necessary stuff. Once I advised a coaching client on how to keep an eye on your expenses. He reported back after few months that he and his wife together are able to save USD 150+ every month from not important stuff and this greatly helped them in those financially tough months. Warren Buffet said something beautiful: “If you buy things you do not need, soon you will have to sell things you need.”
- Pay your bills on time
Late fees and over-the-limit charges can seriously add up to the debt burden. In addition to that, creditors push debtors to pay more to secure their amounts and even put more penalties for late payments. I recommend keeping the use of credit cards to minimum and never ever using the facility of ‘minimum payment’. Always settle the credit card bills in full by the due date to avoid increasing interest. We must remember that interest is one of the filthiest diseases of 21st century, destroying scores and scores of families globally.
- Deal with big issues
If you have large, looming financial issues, such as unpaid loan or tax liability, it is time to deal with them carefully. Contact your creditors and make acceptable repayment arrangements. Implementing a plan to remove these stresses from your life will be good for your mental and financial health.
- Maintain three accounts for your money
Most of us have our money in just one pocket – one bank account. This account has our savings, expenses, our charity…it’s got everything. What you should really do is to have three accounts if you want to avoid a sudden financial crisis.
The security account. This should be a separate bank account, with a separate access, ideally in a separate bank from your regular spending account. In this account, you should have three months’ living expenses. Calculate what that is, fill this account till you get to that level, and forget about the account.
This account gives you security in case your income stops for whatever reason. Just knowing it’s there will make you feel more secure and confident.
The investments account. Every month, you should put a certain amount towards investments. Choose a set percentage or an amount and deduct it from your monthly income immediately after your income is credited to your main account. Invest this amount in some halal investments, which are easily available these days. Now, once you have your security account set up and your investment account going on, whatever is left will go in your regular expenses account.
The regular expenses account. Your regular living expenses, charity, dinners, treats, vacations – You can spend whatever you want from this account without any worry because you’ve got your security account and investment account taken care of.
Finally, you should not forget to think about your life comprehensively with a long term perspective. One of the major reasons why most people, organizations, communities and nations suffer is not working on long term visions and not coming up with a proper strategy to safeguard their respective futures. Just like we have talked about managing our finances, we also have to plan to avoid crisis in other aspects of life, which also requires knowledge, wisdom and ability.