What I’m about to reveal here is what I learnt from two different persons – a neighbour and a colleague. It’s actually the strategies people employ to help them save something out of their salaries (so I guess this post will be more beneficial to salary earners).
At times, salary earners complain that their salaries finish before they are paid. The result of this is that they end up borrowing every time to run their families. This sort of habit is the major reason salary earners hardly save since they use a greater part of their salaries to service loans. Well, I hope the strategies I will table here will be of help to them.
I am going to categorise these strategies into two groups – lessons from my neighbour and lessons from my colleague.
LESSONS FROM MY NEIGHBOUR
We were actually neighbours some years ago while I was in Ibadan. She was working with First Bank of Nig then. From the knowledge she gathered as an experienced banker, she taught some of us that were close to her a particular strategy people employ while trying to save out of their salaries. In this strategy, she said we should pay ourselves salaries from the salaries our employers paid us. Don’t worry, I’ll explain that.
According to her, when you receive your salary, share it into, say four, and keep one part for yourself. Now that part you kept for yourself is your actual salary. This is the part you are going to put away as the savings that is never going to be ‘touched’. She actually recommended that this one-quarter should be channelled into a long-term investment scheme that may take ten to twenty years to mature.
Now, the remaining three-quarters is what will be budgeted for home’s recurrent and capital expenditures. It is from this remaining three-quarters that you pay your rent, tuition, medicals, feeding, clothing and every other form of expenditures. Whatever that remains by the end of the month, or the year, can be reinvested into the long-term investment scheme, or used for some family projects (such as vacation, purchase of a car, house renovation, etc).
For the one-fourth that is saved in the long-term investment, she said that it should not be seen as part of the family income until the right time. In fact, she said that we have to assume that our salaries are short of that amount. What I mean here is, if your salary is #100, 000, and ¼ of it is #25,000, you have to assume that your monthly salary is just #75,000, which is ¾ of #100, 000. That way, your expenditure should be planned with #75k and not #100k. #25k should not be treated as part of the family earnings.
To be able to do this, she states that it will be easier to give your bank a standing order to remove the money as soon as your salary clicks. However, she said that every individual should be reasonable with the percentage of the salary being invested in this way. If 25% is too high for you, you can go for lesser. But ensure that you don’t spend everything.
LESSONS FROM MY COLLEAGUE
So this colleague of mine is a statistician. He teaches Statistics in Federal School of Statistics, Enugu (a school owned by National Bureau of Statistics). So, you will bear with me if I try to break down his lessons using layman’s language.
Well, what I learnt from him is that every salary earner needs to know how much his daily income and recurrent expenditures are. According to him, it is only when you know that you can actually control your expenses and be able to save up some money.
So, to find out your daily income you have to divide your monthly net pay by 30 (for thirty days in a month). For example, if your take home salary is #100,000 per month, when you divide it by 30, you will have approximately #3,300. So, #3,300 is your daily income (don’t bother asking me about weekends).
For your daily expenses, follow the guidelines below:
- Add up your regular daily expenses (such as purchases of snacks, transport fares) and multiply them by 365 days
- Note down your regular weekly expenses (such as weekly purchase of food items) and multiply them by 52 weeks
- Note down the expenditures that come once a month (such as car servicing, bulk purchase of food items, payment of electricity bills, and so on) and multiply by 12 months.
- Note down expenses that come every quarter of the year (such as school fees) and add them up (they are inconsistent so you can’t multiply).
- Take note of expenses done yearly (such as house rents, membership fees for clubs and professional bodies, and so on) and add them up
- Add up miscellaneous expenditures (if you can get all of them)
- Add up all your expenses (from a – e) and divide the result by 365 (for the days of the year). The result is your daily expenditure.
Ok, so statisticians have a way with numbers. But put simply, what he is saying is that you have to ensure that your expenditure never surpasses your income. If your daily income, for example, turns out to be #3500 and your expenditure (after all the additions, multiplications, divisions and subtractions) happens to be #3800, then you are already running a deficit. This means that you are likely going to pick a loan to make up for the balance.
BRINGING THEM TOGETHER
Ok, so I am not a financial expert and I am not a statistician, but I will try my best to bring some applicable strategies from these mind boggling lessons. Below are the easiest steps you can take to save and increase your income, based on these two ‘theories’.
- Divide your monthly salaries into daily incomes. You actually need to know what you earn each day (stop focusing on the bulk that comes at the end of the month). So divide your salary by 30 and see how much your employer pays you for a day. The trick in this strategy is that if you are not happy with the result your calculator gives you, you will start thinking of how to make things better.
- Pay yourself everyday. So, how much are you going to pay yourself from your salary? If your daily pay is #3000, for example, and you decide to pay yourself #500 per day, in a month, you would have saved up #15,000. Remember that whatever you save from your daily pay is not meant to be spent in the near future.
- Increase your daily income. If you are not satisfied with your daily income, then you have to find ways to increase it. For example, you may want to add an extra #2,000 to your daily income by looking for a better paying job or finding a secondary source of income that can give you something close to that amount every day. This means that you may earn an extra #60, 000 each month.
- Increase your personal salary. If you find a way to increase your daily income, you should remember to increase how much you pay yourself. So, don’t relax and spend the extra income you brought home. In fact, try to save half of it, or more.
- Don’t put all your eggs in one basket. Don’t use only one form of investment or investment firm to save. You need to seek proper advice from the right quarters before deciding on long term investments. But, ensure that you save up something.
- If your expenses are getting higher than your income, then you have to make some adjustments. For example, if your salary is #60, 000 per month, it means your daily income is #2,000. If you are living in an apartment where you pay #350, 000 as annual rent, your daily rent is #958. In other words, every other expenditure, and saving, will come from the remaining #1042. Now you understand why you need to know how much you earn and spend in a day.
Whatever you decide, I still advocate that you find a secondary source of income so that you can have enough to save, and spend.