Personal Financial Planning – Managing Expenses (IV)

“More people should learn to tell their dollars where to go instead of asking them where they went.” – Roger Babson Today, we will discuss a few specific measures of managing expenses that we can take. But managing our expenses requires an understanding that: 1.Most of the expenses we incur push us only a little […]

“More people should learn to tell their dollars where to go instead of asking them where they went.” – Roger Babson

Today, we will discuss a few specific measures of managing expenses that we can take. But managing our expenses requires an understanding that:

1.Most of the expenses we incur push us only a little towards our goals (in other words, we need to focus on the effectiveness of what our spendings achieve for us),

2.Any Naira you save becomes available to be used for something else (in other words, we need to focus on the efficiency of our use of financial resources),

3.Being effective and efficient in the use of your financial resources does not make you ‘cheap’. You are just being pragmatic. (In other words, we must have personal spending standards that deliver results for us and for which we owe no one any apology).

Specifically, we can strive to minimise our expenses by taking the following measures.

First, track what you spend on: Earlier, we discussed that it is ‘difficult’ for us to budget in our environment due to factors like inflation, cultural expectations, etc. In reality, however, it is partly our ego and partly a lack of financial wisdom that complicates otherwise easy decisions for us.  To be able to manage your expenses, you need to first know what you spend on. Take a monthly recording exercise for a few months. Capture every expense on a daily basis and group them into classes such as feeding, transportation, gifts, etc. Assess each class in terms of how it pushes you towards your long-term financial goals. Examine each in terms of how much less you can spend and still achieve the same short-term objectives. You may be surprised how substantial amounts that you spend may be unnecessary and/or how little they actually help. In essence, try to optimise each expense.

What fixed/semi-fixed expenses can you reduce or eliminate altogether? Fixed expenses can take a heavy toll on finances. These might be principal and/or interest loan repayment on long-term loans; Periodic rent payments; Payment for utilities, etc. Identify all such expenses and find creative ways of eliminating some of them or at least reducing their quantum and negative impact. Obviously, some of these fixed expenses might be worthy. For instance, you borrowed money and bought a bus that provides passenger transportation services. If the revenues generated from the services cover both the operating expenses as well as principal repayment and interest servicing, in addition to some net income that comes to you, then this is fine. All other expenses should be looked at with a keen mind.

Can you reduce your non-income-generating travels? Travelling is becoming a lot more expensive in our country. This includes both intra-city and intercity. Gone is the time when we travelled for both social and business purposes without a firmed-up prior arrangements as regards what we hoped to achieve. We should now be more critical and ensure that each journey stands a high chance of achieving the purpose it is meant to achieve.

Minimise personal loans: There may be times that it makes financial sense to purchase goods and services on loan IFF we work out the numbers, in terms of the return we are expecting, the principal and interest that we will be paying over the tenor of the loan, as well as a consideration of inflationary factors. Outside these, it is almost always better to save and buy on a cash-and-carry basis. Again, a Personal Financial Advisor can help in making such assessments on a case-by-case basis, especially when substantial amounts may be involved.

Always have a shopping list: Often, many of us go shopping with neither a budget nor a list. This is very unwise and leads to financial waste through impulse buying. We should make our shopping an intellectual rather than an emotional activity. Let us have a budget for what we need to purchase in the month. Then let us have a list of what we will be buying on a particular shopping outing. This should apply as much as possible, even when we take our families out to lunch or dinner. Obviously, the extent to which we can push this will be determined by our realities and priorities.

One of the richest men in the world, Warren Buffett, narrates how he buys breakfast at McDonald’s (in which his Berkshire Hathaway has substantial holdings). This was captured by Business Insider:

Every morning, Buffett tells his …wife, how much exact change to place in the center cup holder of his car. It’s either in the amounts of $2.61, $2.95, or $3.17. “When I’m not feeling quite so prosperous, I might go with the $2.61,” he explains. “That’s two sausage patties, and then I put them together and then pour myself a Coke. $3.17 is a bacon, egg, and cheese biscuit. But the market’s down this morning, so I think I’ll pass up the $3.17 and go with the $2.95.” Across the ocean to Nigeria, I remember sitting for breakfast with a super-rich person in this country. What did he have for breakfast? A bowl of ‘pap’, one wrap of moin-moin and a glass of water. These do not make the two rich people any miserly or cheap. No. They just have their priorities clearly set out. If they want to invest, they would do so in billions of US dollars without batting an eyelid. The former is literally consumption, the latter is for some productive purpose.