Surviving tough financial times… Preserving your life’s dreams

“Manage Your Money… Live Your Dreams”.

24.OCT.08

We all have lifetime financial dreams, whether it is being able to afford a college education, purchase a brand new car, construct the proverbial home with the white picket fence or being able to retire comfortably. In challenging economic times, our dreams often appear unattainable.{{more}} However, with proper planning and frugal budgeting we can survive tough times and achieve our lifetime goals.

“He who fails to plan, plans to fail”

The first step in planning for your dreams is to establish your financial goals. Goals are set on a number of different levels. They can be short term, such as planning a cruise vacation, or long term, such as retirement planning. Goal setting is simple. First you create your “big picture” of what you want to do with your life, and decide what large-scale goals you want to achieve. Secondly, you prioritise your goals by identifying the goals that are most important to you. Finally, you break your large goal down into smaller and smaller targets that you must attain.

A useful tool to help when setting your goals is the “SMART” acronym. In setting your goals you need to ensure that your goals are specific, measurable, attainable, realistic and time driven objectives.

Specific – What do you want to have happen or what do you want to achieve?

Measurable – You need a way to measure the progress.

Attainable – An attainable goal is a goal for which you see a realistic path to achievement.

Realistic – Your goals need to be manageable, attainable, believable and your own.

Time driven – Your goals need to have a starting point, a timeline and an ending point.

Once you have set your goals, the next step is to develop a plan/budget. A budget is a financial tool to assist you in meeting your small targets on the way to achieving your ultimate objectives. Budgeting helps you to spend your money on the things that are important (i.e. needs) rather than on trivial things (i.e. wants). You do not have to be a financial wiz to prepare a budget. All you need is a pen and a piece of paper.

Firstly, you list all your current income and all of your expenditures. An important expenditure you should not omit is payment to yourself (i.e. savings). The importance of personal savings as an expenditure on your budget cannot be over emphasised. This savings will come in handy on rainy days. Secondly, subtract total expenditure from total income. This shows if one has a surplus or deficit. If there is a deficit, review expenditures and classify needs versus wants and eliminate wants.

“If you buy what you don’t need, you might have to sell what you do need”

In preparing your budget, it is vital that one distinguishes between wants and needs, essentials and non-essentials. A want is something you would like to have. It is not an absolute necessity, but it would be a good thing to have. A need is something you have to have, something you cannot do without.

The basic human needs are generally characterised into three broad headings – food, clothing and shelter. We all need to feed ourselves, clothe ourselves and have a roof above our heads. However, within these categories there are important decisions to be made.

We need food to live and remain healthy, but how and what we choose to eat is up to the individual. For example, we can choose to cook or buy already prepared food. Eating out daily is more expensive than cooking at home, so cooking at home is one of the fastest ways to trim your budget. In addition, you should consider that home cooked meals are often healthier and, therefore, could save money on future medical bills.

We need clothing to remain comfortable and appropriately dressed. However, do we need to buy name brand clothing exclusively? Couldn’t we mix it up a bit? Also, do we really need to have a new outfit for every function? Clothes can be worn repeatedly just ensure that they are clean and tidy.

We need a roof over our heads to provide shelter from the elements and security. Building too much of an elaborate house results in large monthly mortgage payments that consume a large portion of your income. Therefore, when hard times hit you might not have the financial flexibility to adjust. However, building a basic moderate house will result in an affordable mortgage, which leaves you with a larger disposable income to remain flexible in challenging times.

When you start looking at the small number of things in your life that are actually needs, you really begin to see the “bigger picture” of how many things you buy simply because you want them, and then you start to realise just how much wastage you can really cut by distinguishing between wants and needs.

Once you have eliminated most of the wants from your budget, you then recalculate. If you still have a deficit, then you should identify the areas where overspending is still evident and areas where you can cut back. It is also important to identify areas where expenditure can be postponed. You can also look at other ways to increase your income, either by getting a better paying job or taking a second job.

After you have prepared your budget, you have to be disciplined to adhere to it and avoid overspending. When we are tempted to bust our budget we should ask the following important questions; do I really need it? Why do I want it? What are the tradeoffs? When grocery shopping, make a list and stick to it. Do not buy what you cannot afford. This is often the easiest point to understand, but it is one of the hardest to implement when faced with temptations.

Beware of sales, they are notorious budget busters. If there is a sale you do not have to be there. Only go to a sale if you are after a specific item you have already identified as a need in your budget. In fact, you should try to postpone certain purchases until the item goes on sale.

Avoid taking on unnecessary debts. If you cannot pay cash, you probably can’t afford it. In our credit crazy world, amassing debt no longer carries a social stigma. Everybody has higher purchase or credit card payment. Well, remember what your mother said about everybody jumping off a cliff? Just because “everybody” is doing it doesn’t mean you have to do it as well.

In today’s consumer driven environment, it is not easy to change and abide by the simple principles of financial responsibility. We are bombarded with temptations through television and radio advertisements to spend irresponsibly. But the best way to prevent financial distress in the first place is through planning and budgeting. Careful planning and a willingness to make tough choices is the key to success. With smart goal setting, prioritising and budgeting, you will be able to successfully navigate the dark waters of economic worry into a place of financial safety and soundness.

This article was written by Bernice Grant-Kelly, Senior Manager, Bankcards Division and Anthony Galloway, Senior Manager, Internal Audit Unit, St. Kitts-Nevis-Anguilla National Bank Ltd as part of the activities commemorating Financial Literacy Month, October 2008, an initiative coordinated by the ECCB.

Financial Literacy Month October 2008 – Manage Your Money ….Live Your Dreams.