Money 101 – Lesson 4: Understanding the Tools

(This is the 5th article in the Money 101 Managing Your Money Series. We advise that you start from the the first article in the Series. Please click here to go to the Money 101 Managing Your Money introduction)

In Lesson 2, we looked at where we would like to be, and in Lesson 3 we worked out where we are in terms of what we make vs spend and what we own vs owe. The next question then becomes ” How do you move from where you are to where you want to be?”

Before we go into the how – which we’ll cover in the next lesson: Lesson 5: Creating a Plan – we shall take a look at the tools that we will use in getting us from where we are to where we want to be.

There are 4 main things that we will need to help us achieve our financial goals and they are listed below. We shall look at the tools in details further below.

1. Income: Income is self explanatory; it is the money that you as an individual make after the government has taken its cut by means of taxes. Income is the most important tool; if you have no money coming in, then it becomes impossible for for you to achieve your financial goals. The objective here is to maximize income; the more money you have available to you, the greater the goals you can set and the  faster you can accomplish them. You can maximize your income by:
   1. Minimize your taxes: When you created your income statement in lesson 3, one of the things that you tackled was tax deductions from your gross income. By minimizing how much you pay in taxes, you are able to free up more money for your financial goals. Some ways of minimizing your taxes are
      • • Saving with a registered home ownership plan eg Housing Finance’s 1st HOP account. This account will allow you up to KES 4,000 per month pre-tax free.
        • Taking health insurance from your employer
        • Taking lunch at the office canteen if you are a ‘low income employee’ which will not only save you the actual lunch money, but the tax that will be levied on the lunch benefit.
        • Contributing to a defined contribution fund such as a pension scheme will allow you up to KES 20,000 pre-tax.
   2. Get additional sources of income: By creating a ‘side-hustle’, you will be able to generate extra income that you can put towards achieving your goals. Some of the side jobs we have seen are:
      • • Making and selling beaded jewelry
        • Freelance writing
        • Freelance software development
        • Freelance creative designs
        • Photography
2. Saving: Saving, by definition, is the setting away of an item, or in this case money, for later use. In this series,  saving is also the means by which we reduce our expenditure as part of our maximizing our income. Saving is the second tool after income as you need to squirrel away money to pay for items at a later date that are part of your financial plan, and to pay for those that require on- going payments such as insurance, pension schemes and more. With saving, we need to minimize how much we spend on items that do not gain value with time or safeguard us, and put more into creating growth. Under saving, we look at the accumulation goals we discussed as one of the areas of personal finance planning in Lesson 1. Some of these goals are:
   1. 1. • Deposit for a mortgage
         • To buy a particular item or pay for something on your bucket list
         • For retirement
         • For emergencies
3. Debt: Mention of the word debt strikes fear into the heart of many. While it is true bad debt is the reason why most people will be stuck in a financial rut for a lifetime,  good debt is the reason why many are successful.Debt is any amount owed to a person or organization for money borrowed.  Debt is very important in the path to financial success because it allows us to acquire those items that we would not be able to save up for, or would take too long to save up for. There are 2 types of debt; good debt and bad debt. Good debt is debt that you incu and put the money to an that will gain in value, preferably exceeding the amount borrowed and the interest charged. A mortgage is an example of good debt. Bad debt is debt that you incur but put the money into items that will not create value. Bad debt includes credit card debt, debt incurred to pay for a holiday.
4. Investing: According to investorwords.com investing in general terms is using money in the hope of making more money. When people think and talk of personal finance, they are usually referring to investment. Investing differs from saving in that in investment, the primary objective is returns (making more money) while in saving, it is delayed usage. The areas under investing that we shall look at are:
   1. 1. • Investing in Yourself
         • Investing is Stocks
         • Investing in bonds
         • Investing in real estate
5. Insurance: The main function of insurance is safe-guard our goals and dreams from the things that happen in life that could throw us off course. There are several types of insurance that we will need in the  execution of our financial plans:
   • • • Health/medical Insurance: The function of medical insurance is to make sure that should we fall sick or have an accident, the costs of treatment would not derail our fiancial plans
       • Automobile insurance: This is to ensure that if our beloved jalopy is involved in an accident, we are compensated and are able to take care of other liabilities arising
       • Personal Injury Insurance: To ensure that in the even of an accident, should we be unable to work, then we will be compensated.
       • Life insurance: To safeguard those that depend on us when we pass on.

These are the tools that we will use in the planning and execution of our financial road-maps.

Next: Money 101 – Lesson 5: Creating a Plan

1. Money 101 – Lesson 1:  Introduction to Personal Finance
2. Money 101 – Lesson 2: Goal Setting
3. Money 101 – Lesson 3: Assessment
4. Money 101 – Lesson 4: Understanding the Tools
5. Money 101 – Lesson 5: Creating a Plan
6. Money 101 – Lesson 6: Implementation
7. Money 101 – Lesson 7: Monitoring and Assessment