PERSONAL FINANCE: The true cost of ‘me’
Do you really know how much it takes to sustain your life in one month, or have allowances and expense accounts clouded your budget? Photo/FILE
What you need to know:
- Your true cost includes all your expenses irrespective of how they are paid or where the money comes from.
- Sheila has found that her true cost is higher than what is displayed in her budget. Her emergency fund was based on her budget and not her true cost.
- That is why it is diminishing a lot faster than she expected. The correct way to have done her emergency fund planning was to base it on the higher amount or to reduce her expenses.
Sheila* wrote to me a few days ago and said that her emergency fund had failed her. Sheila was retrenched recently, but she was prepared for it. She had saved up and was working with a monthly budget. She reckoned her emergency fund would cover her for four months after she was retrenched but to her surprise, her funds were dwindling faster than she had estimated. Where had she gone wrong?
Sheila had fallen into a trap many of us get into, where we plan our budget according to ‘cash in, cash out’. This sort of planning does not reflect our true cost of living. Let me explain.
Many people receive certain allowances at work – phone, car, house, fuel, entertainment. We use free office Wi-Fi and medical cover too. Sheila has probably never had to buy things like pens because she could always get them from the office. All of these things cost money and when we are forced to pay for them ourselves, even ‘tiny’ costs such as Sh100 airtime od Sh50 for a biro pen will distort planning. If Sheila maintains the same lifestyle as she did while employed, all these costs will add up.
Your true cost includes all your expenses irrespective of how they are paid or where the money comes from. Sheila has found that her true cost is higher than what is displayed in her budget. Her emergency fund was based on her budget and not her true cost. That is why it is diminishing a lot faster than she expected. The correct way to have done her emergency fund planning was to base it on the higher amount or to reduce her expenses.
Young people who are still living with their parents make this mistake a lot. They move out of home without calculating what it actually costs to eat three meals a day, pay for electricity, water, gas, transport and so forth. They assume that just because they have enough to pay the deposit, rent and furnish the house, they will be OK.
Many people move jobs for what looks like a higher income but fail to incorporate the expenses the current employer pays for into their salary negotiation. The new salary then does not offer the increase they had hoped for. For example, if your current employer is paying for your phone use and fuel, a Sh20,000 bump in salary will not offer much benefit. Many domestic workers make mistakes because of not understanding this.
Couples make similar mistakes when planning. Many do not plan for emergencies properly because of the way finances are managed. In many two-income households bills are separated; for example one person pays the rent/mortgage and the other buys the food. In an emergency, all the bills may fall on one person. However rent will still need to be paid, food eaten and kids schooled, all on one income. Plan for that.
If you are in business, it is crucial to separate personal and business expenses in order to be able to take care of the true cost of ‘you’. When these two categories are intertwined, you do not get a clear grasp of your true cost. You can’t plan what to earn, what to spend, what to save or how to deal with emergencies. So don’t just do a budget: Understand the true ‘cost of me’.
For more help on debt visit Debt Makeover by Centonomy on Facebook or email [email protected] for how to enroll in a debt programme.
