At the start of this month, I challenged you to be more diligent with your finances; to track your inflows and expenses to really understand your money’s movement. If you did this, you might have noticed at least one thing: it’s infinitely easier to get money out than it is to bring it in. This is why you need goals and a community of like-minded people to guide your decisions and make you more aware of your motivations when spending.
Be as diligent with your finances as you like, life can still happen. You’re planning a fantastic 2020 and COVID happens. You’re expecting a raise at work, but instead, the company shuts down. Life happens, unexpected expenses have a way of knocking us off balance and that’s where cash flow planning becomes important. Unplanned expenses or horrendously bulk outlays can quickly erode the financial safety net you’ve spent so much time building. This is why insurance and access to credit are so important.
First, let’s talk about unplanned health, family, or other obligations. There are two ways to plan for the unexpected – first, get in the habit of saving a portion of your income away in an emergency fund. We talked about this last week when we discussed how inflation impacts your savings. The other way to plan for emergencies is to have insurance for those specific types of emergencies. Health insurance and car insurance are some of the basic ones.
Next, let’s discuss horrendously bulk outlays such as rent, car purchases, major trips, weddings and so forth. If your savings allow you to handle these major expenses without depleting you down to zero, that’s fantastic. But imagine the perfect storm of unfortunate events where you depleted your savings paying rent and in that same month, you’re laid off from work. You are likely left with only one option – borrow money to get back on your feet.
Ironically, the only way to ensure you have access to credit when you need it the most is to actually use it judiciously when you need it the least. When all is fantastic and you’re saving reliably and living your best financial mastery life, that is exactly when I suggest you look into accessing credit. Build your credit profile as needed to ensure that you are viewed as a safe and reliable borrower by any lender.
It is also best to go deep and develop a relationship with a specific one or two lenders rather than spread yourself across the growing expanse of lending providers. As you develop depth and a relationship with them, your time is actually yielding the dividends of an improved credit profile. If, however, you spread yourself across several players, you run the risk of not being sufficiently profiled by any of them and unable to access any substantial amount of money when you might actually need it.
When you’re building your credit profile, pick a specific use case. For some it’s all their grocery spending; for others, it’s all of their spending on devices and electronics. But pick a specific category with which you will build your credit profile. Always pay before the due date. Contact the lender and find out exactly what you must do to improve your credit profile. Credit across Africa is growing and very soon, it will become an inevitable part of our lives. That’s a good thing. It will mean better access to housing via mortgages and the potential for a generally improved quality of life for millions of people. You can prepare for this future right now by learning how to use and repay credit before the stakes are high.