#InspireMondays: How to Clean Up your Finances

YAY! Its officially 6 more days to the #RedefiningFinance Event and we are SUPER SUPER excited. To prepare our minds for the event, we decided to post this article from our headline speaker Arese ugwu of smartmoneyafrica.org-3 easy steps to organize your money. What we loved the most about this article is how ‘easy’ and practical it really was! We hope you find it as inspiring as we did.

1.Create specific goals

Most New Years resolutions don’t work out because they are merely vague aspirations with no action plan. For example Osamede’s New Year’s resolution for the past 3 years has been to buy Land. This never happens because each year by the time the bills start to pile on, he decides he is not yet earning enough to afford this goal.

A better way to approach this would be for him to say, I currently earn N3m a year.  What area in Lagos is realistic to buy land, given my salary?  Because ‘Water get level’, land in Banana Island and land in Ikorodu are not the same price, so it might be reasonable to settle for land in a growth area like Sangotedo, which has the potential to appreciate substantially in value over time.

Lets assume a plot of land costs N2m. If he sets aside 20% of his income every month (N50k a month/N600k a year) and puts it in an investment account that earns a 7% return p.a.  He has a better chance of reaching his goal in 3 years.

We are more likely to smash our goals when they are as specific as possible, realistic in comparison to our present income (not future income) and have a goal date with a Naira amount attached to it.

2.Establish separate accounts for each goal

So confession time! My name is Arese and I am an impulsive spender! But they say the best way to deal with a problem is, acknowledge that you have one right? Then find a way to deal with it. So I guess I’m on the right track.

I have found that if I ‘mistakenly’ leave my disposable income in my ‘everyday’ account. I will find ways to spend it mindlessly, from drinks with the girls to new toys for Zikora or furniture for the house because that’s just how my brain is programmed.

To deal with this I found a system that would remove me from the equation, help me avoid temptation and force me to achieve my goals without procrastinating because a habit I’ve spent years subconsciously cultivating, is not automatically going to change on its own.

This is how it works. Create multiple accounts, one for each goal. Then ensure that what you decide to allocate from your income to each goal is automatically debited from your salary. That way you don’t have a say in the matter. (Make arrangements with your bank to debit your account on particular dates).

However, the only way this will be effective, is if you limit your access to all but one account. The account you require to pay bills for the month and you should only have an atm card or chequebook for this account.

All other accounts should be set up so you, either have to go into a bank, write a letter to request your funds or bear some type of monetary penalty to gain access to the money in all other accounts. This way your mind is programmed to ‘think broke’. For example, if you only have N75k in your ‘bills’ account every month and you are used to living on a N100k, it’ll be hard at first but you will eventually adjust to thinking that’s all you have.

If Osamede was to do this…

1. An account for emergencies because you never know when your car is going to break down or when you have to send money to the village.
2. A ‘turn up’ account because we work hard so we can play hard. Otherwise you’ll be setting yourself up for over spending, which will jeopardize your financial freedom in the long run. (This could be for shopping, traveling, anything that makes you happy). Planning for it means you spend mindfully and within a budget instead of impulsively.
3. An account for rent because it’s easy to procrastinate and wait 3 or 4 months before the ‘gbese’ is due then start panicking and borrowing. It’s always better to have an account dedicated to this that you put aside systematically each month. (This works for school fees as well)
4. An investment account because there’s no point working hard, year after year earning N3m a year spending it all and then your net worth is N150k. its best to systematically put aside a proportion of your salary towards building assets that will earn you an income.
5. An account for, bills because Lagos is expensive, food, salaries, transport costs etc.

3.Create a money calendar

Ok lets be honest by the time the year ends most people don’t even remember what their New Year’s resolutions or goals were at the beginning of the year. So it’s important to write them down somewhere that’s accessible to you everyday. i.e. your phone.

Create a to-do list for each goal. For example, checking your balance in all accounts each week, each month or each quarter to see where you are in comparison to your goals. Then set reminders in your calendar all through the year that hold you accountable and help you develop a systematic review process.

‘Apps’ like Trello, Google calendar and Ever note, help you keep your goals visible through out the year and remind you to stay on track.

Poor organization usually leads to bad spending decisions. When you figure out how to organize your money and create a system that makes you more productive. You are already 10 steps ahead on your journey to financial freedom.