In tough economic times like these, people often regret their past money mistakes. People remember how they squandered money in the past, thinking the good times would last forever or be succeeded by better times. The bad news is that you cannot repair the past. The good news is that you can prepare for the future.
The future of the economy is bleak. People have been asking me about how they can prepare themselves. We have discussed these preparations many times before. This is for those who have forgotten or weren’t here before.
You need to do a personal finance stress test to establish how exposed you would be should the risk of economic collapse materialize. To do this, you need data. It would be best if you tracked your income and expenses for a period of time. Keep records of everything.
Armed with that data, you should build a safety net to host you when the financial storm kicks in. Have cash that can cover your expenses for at least six months. Also, invest in things that provide you with passive income, which you can live by even in times when your active sources of income are depleted.
Your aim should be to have sufficient passive income to cover your non-discretionary expenditure (rent, food, school fees, healthcare, etc.”
Building passive income and safety nets means you have to make sacrifices. Cut off unnecessary spending and invest that money in something that generates income. If you are employed somewhere and are being paid, treat every shilling you receive as if it is the last.
The other preparation concerns establishing an alternative lifestyle you can fall back on should things go south. If you have an upcountry home and land, use it economically. Prepare psychologically to vacate the city should it come to that. Sometimes in battle you need to retreat to advance.
In times like these, a lot of flexibility and adjustment is necessary. If you lose your source of income, adjust your lifestyle swiftly to the new reality. Don’t waste time hoping that things will get better. If you are struggling with an expenditure, be it rent or school fees, downgrade your lifestyle. Don’t throw good money after bad money.
There is no shame in stepping back to rebuild your life. Live within your means unless someone is paying you to do otherwise. People will always have things to say about you, whether you are broke or rich.
Remember the saying that “cash is king”. It is crucial to stay liquid. If you have illiquid assets, it is a good time to offload some. A time will come when everyone will try to sell, and there will be few takers. You could find yourself in an awkward position where you are asset-rich and cash poor.
I don’t want to be a prophet of doom, so I will remind you that this is also the best time to invest. Asset prices are declining, and yields are rising. If you have an extra income, this is a good time to consider buying cheap assets giving excellent returns. Stocks are some of such assets, and many trade at hefty discounts.
Borrowing should be treated cautiously at this point. Taking up a lot of debt in economic uncertainty is not wise. Interest rates could rise and send you into bankruptcy. The golden rule of personal finance is to; earn diversely, save regularly, invest wisely, borrow sparingly, and repay promptly. Debt is the shortest path to an early grave. Avoid it if you can.
Be careful where you invest or save your money. Difficult economic times come with risks of financial instability. Scammers also take advantage of people’s desperation. Don’t save money in weak financial institutions, which can collapse. Also, have accounts in different banks since diversification is the best way to manage risks. You can even keep your cash in foreign currencies.
Economies will always manifest boom-burst cycles. The only way to stay safe is to prepare for any turn of events.
Lastly, keep your ears on the ground. Read widely on business and economic developments. In such times, information is power, and ignorance will be heavily punished. All the best. Remember, tough times don’t last, but tough people do.
Author: Ephraim Njega (FinTak)