Elizabeth Irungu: why people change their lifestyle to cope with harsh economy

The cost of basic commodities has risen in recent months, even though incomes have not increased in the same magnitude.

It is typical that during inflationary times when one has the same amount of money to budget for expenses before the next paycheck, they are unlikely to maintain the lifestyles to which they have grown accustomed.

If one is not careful, they may incur massive debts to finance the extra money required to supplement these lifestyles.

Making lifestyle changes is a hard choice, especially given the social pressures that influence our consumption behaviours such as the schools our children attend, the homes we live in, the cars we drive, and the social circles we associate with. 

However, it is critical to distinguish between one’s needs and wants to comfortably live within one’s means. Needs are all those budgetary items that you require to survive while wants are desires that one would be able to live without.

As a rule of thumb, needs should account for 50 per cent of your disposable income for a standard family; wants 30 per cent and savings 20 per cent.

According to S&P’s 2021 Global Financial Literacy Survey, only 38 per cent of Kenyans are financially literate, implying that a sizable proportion of Kenyan adults are unable to make the necessary financial adjustments during economic downturns.

As a result, a large portion of the population is vulnerable to making poor financial decisions due to a lack of financial management knowledge.

Consequently, now is an excellent time to consider finances and how to manage them to withstand economic changes and fluctuations. Here are a few tips on how to manage personal finances during economic downturns.

Save first

When finances get squeezed the instinct for most people is to cut back on savings to maintain their lifestyles as is. Prudent financial management requires that you do not cut back on savings in such times because your savings are like insurance that will protect you from unexpected shocks.

My advice to clients is to always automate their monthly savings by maintaining a current account and a savings account with an auto-save instruction. Do not save after spending, rather save before spending.

While physical banking provided checkoffs that taught us discipline, neo-banking puts the power in your hands if you have the right opportunity and expertise to guide you on how to manage your finances.

The advent of digital technologies has provided solutions that are easily accessible, thereby enabling financial inclusion. They have also enabled innovation by providing people with greater access to a variety of financial products and services.

For example, Absa Bank’s digital solution Timiza integrates various products into its interface. On the same platform, a customer can apply for loans, save for a goal with guaranteed interest, and get insurance.

For those looking for more sophisticated savings programmes, you can automate your savings to a money market fund. A money market fund will preserve your initial savings and earn you interest with a monthly compounding benefit.

Live within your means

This is an adage that remains as relevant as it was then. It transcends generations. Living within your means requires that you do not use debt/borrowings to sustain your lifestyle. To achieve this goal one has to assess their spending habits against their income to identify if they are overspending or not. I recommend the 50:30:20 (Needs: Wants: Savings) budgeting principle as a simple guide to maintaining your lifestyle within control.

Should you find yourself overspending then one has to make bold and deliberate choices to cut back on the expenses or grow their income. Getting additional income may be a medium to long-term plan but costs are immediate. I, therefore, recommend that you start by scrutinising your costs line by line to catch those leakages in your income.

In times of economic hardship, one has to develop mental fortitude to be able to make rational decisions like cutting back on lifestyle such as moving children from pricey schools to less pricey schools or shifting from one city to another to ably manage the bills. In a family setup, we encourage consensus decision-making to avoid family conflicts.

Practice financial wellness

Financial literacy is critical to the health of our societies. To ensure our financial well-being and security, we must effectively manage our income, debts, investments, and savings.

According to a Forbes article published last year, financial wellness is a relative measure of a person’s ability to manage their finances. It entails managing finances, improving financial situation, and ensuring a financially secure future.

As we all go through different stages and situations in our lives, we should be adaptable enough to change our lifestyles to match our income and goals. It is also critical to have a certified financial advisor or financial manager guide you through financial management. Financial freedom is an ideal state that can be achieved by anyone with good financial management.