Personal Finance – From A Techie’s Mouth

After the last few posts on personal finances, one of my readers approached me on the side bar and accused me of being conventional, and as such, wasn’t helping him. I was giving information that we all knew, but I needed to break it down into steps that he could act and work on, and in tech friendly terms.

From our conversation, I have managed to come up with several tips which I can call Personal Fund Management Tips, From The Mouth of a Techie, because looking back, he actually enumerated them, not me.

Personal Fund Management Tips:

We divided the types of funds one should maintain into 3. By fund, I mean money set aside to do various things that need to be done, away from normal spending on items such as rent, entertainment etc.

Spending Fund – This is money you set aside every month, to make a certain purchase. I’m told this can be a Mac Book (sigh), for me it would be a radio (true story) etc. Key things about this fund are:

Set a budget. Window shop for the item you want, establish how much you want to spend on it, that way you have a target to work towards.

Discipline and focus. I don’t  need to say more on this.

Be realistic. This fund is the most volatile and most exposed to life’s emergencies. These will happen, and you might have to from time to time use these funds for other things e.g car accidents. It’s good to be flexible that way you don’t get discouraged every time you have to spend the money on other things and have to start all over again.

Avoid using a credit card to buy these things. Actually, destroy your credit card if in the past you’ve used it to purchase non critical items you can save up for ( my Barclaycard is lying in 2 pieces on my dresser as we speak).

Emergency Fund – This is the money you set aside to insulate you from loss of income for a period. The standard is to set aside 3 months worth of your monthly expenses. For the employed, it’s assumed that within 3 months, one would have repositioned themselves in the job market. The techie came to these conclusions regarding the emergency fund:

3 months worth of expenses is reasonable

Give yourself time to accumulate this. If you have a lumpsum (like a bonus), you can set it all aside, but otherwise, give it 1-2 years to accumulate this, so as not to cripple the other funds.

Investment Fund – This is what people call the retirement fund, or money that is part of your get out of the rat race strategy. In our talk, we used buying a home as an example of an investment fund. Techie says:

Set the long term target. This would be the approximate cost of your home, and the time within which you want the home, then establish how much you need to save per month to get there. Again, be realistic to avoid discouragement. To save Kshs 10 Million in 10 years would require that you put aside Kshs 83,333 per month. But then this assumes the money won’t grow. Most people aren’t able to do that now, but we assume that your income will grow. You can resolve for example to invest 20% of your gross salary into the Investment Fund, that way as your income grows, the Fund savings grow.

Invest the money in other channels. The Investment Fund shouldn’t just lie around. It’s for a long term goal. If your goal is to spend the money in 5 + years, then I would recommend you invest in the stock market. How to invest in the stock market?  A topic for another day. One can also invest in real estate (a topic for another day too), or in business ( a topic for yet another day).

Set short term milestones. According to the techie, they have very short concentration spans, and as such, waiting 10 years to celebrate a house purchase might be asking for a tad too much. We concluded that one should set at least 1 year milestones. One can for example set Kshs 100,000 milestones. Everytime they save 100k, they take a 1 month savings break and treat themselves. Buy something fun, go on a short holiday etc.

For once, a techie making things look so simple!