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Wednesday, September 2, 2015

Breaking Out of the Financial Rat Race

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The financial rat race is an endless, self-defeating and futile pursuit of financial freedom. It depicts  the futile efforts of a lab rat trying to escape while running around a maze. The rat never gets out of the maze and the sad bit is that it has nothing to do about it. Just like the poor rat in the maze, many of us find ourselves trapped financially. 

It is a common problem among the working professionals, for salaries to disappear as soon as they hit their accounts. Two weeks after receiving the salary, you are broke and wondering who will loan you money to sustain you for the next 15 days. This translates to living a half a month on debt which must be paid next month.  As much as you would wish to, you tend not to have an escape route as you are poised to borrow every month to finance your past expenditure. You keep on promising yourself that with the increase in income, you will settle all your debts, be financially stable and save for your future. However, as your incomes grow, so is your expenditure. As you think on how to cover the debts, more expenditure awaits you. Your kids get old enough for school, medical emergencies become inevitable, you need a car etc. You end up consuming all you have made, if not more. The debt burden grows: morgages,car loans, school fees loans and the rest. Fast forward to that day you would have wished to retire and you find that you cannot. Why? You do not have any saving to sustain your life. Call it whatever you want but, the truth is you are dependent on work to eat. You are in a financial rat race. So why does this happen and how can we break out?

Reasons why you are Always broke:

1.You lack a budget
Are you an impulse buyer? Do you buy things on the whim, without analyzing if it is a necessity or not. For your money to be of any help, you have to enlist all that is a necessity and in their order of need. Leave out anything that you can do without. Remember savings is the first necessity here, followed by debts. Helb loans, M-shwari, friends soft loans, comes to mind. Save for your future and have a plan on how to clear your debts. When the budget is made and sound, adhere to it. 

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2. You are not saving 
I wish I would have started with this, but for me budgeting comes first. 
Do you always spend everything in your account? This will surely leave you broke and in debt. You must save for a rainy day. Savings or investments should never be sacrificed for expenditure. It is rarely possible to do what you intend to i.e. start savings when the income increase. The moment you get a taste of what you can consume rather than save, you will continue doing that. So it is good to make saving a culture. Savings should not became the option and consumption became the necessity. To break out of the financial rat race you have to acknowledge that expenses will always go up, so to postpone savings is lying to yourself.  Inflation is constantly living with us, only the rate changes. In fact the more you climb the social ladder the more things are thrown at you to buy. Whatever life you choose, the level of savings should never depend on the cost of living. That is why saving should always be the first in your list of necessities and should never be compromised whatever the situation. (Repeat). When your expenditure increases, reduce other consumption. If your motive of working hard is to cover for increased expenses, then this will never end. Rise in expenditure will always outshine your income increase. There will always be that new thing to buy, new cars to drive, new places to visit, new schools etc.

 3. You are Philanthropic
Is it common for your relatives and friends to call you once it is end month to send them something? Do you feel compelled to do that even at the expense your own needs? You need to stop this. Even though it is good to help your relatives and friends, do so with your financial status in mind. If you are not able to help just explain to them in a polite manner that you are not in a position to do so. You may help them later on when you are able to. It is mediocre to help your brother pay his son's school fees only for your child to be sent home for lack of school fees. I know they will talk bad if you don't help, but remember you do not achieve anything by pleasing people. Be honest about it and all will be well. The blessings will come, especially when you will be helping again.

4. You are constantly Borrowing:
 Are you always seeking a soft loan to upgrade your life? You must stop this. Loans are not bad, per se, however, borrowing for aspiration is bad debt. Loans are important for personal development and growth. However if you constantly borrow even for the slightest things, you will forever remain broke. You will be depressed to learn that after paying your debts, you always have nothing left to consume, let alone save. Always live within your means. By this I mean, buy what you can afford not what you can afford repayments on. (Repeat).  We often confuse these two.  Just because we qualify for a loan to buy it does not mean we can afford it.  The trap of borrowing to maintain an aspirational lifestyle is very common and it will lead you straight to the financial rat race. Borrowing for a holiday, taking M-shwari loan for lunch, swiping a credit card at a restaurant, and using your AFB credit card on that trendy shoe is not right . Do not borrow to live a life you cannot afford. (Underline)

Because of all these reasons, at the end of the day you will not have an exit.  You cannot stop working because  you never invested enough to sustain your lifestyle. The true means out of this rat race is having built an investment portfolio that can sustain your lifestyle. NSSF pension funds alone will not be enough. Therefore, to live and sustain the lifestyle you desire, you not only have to work hard now, but you need to prioritize building of the assets rather than consumption. Have your priority right and you will be amazed at how much wealth you will accumulate. You may even find yourself retiring early.