Will you get me out of the rat race: Part 1

Guest post by Samuel G. Njenga

I have a friend called James whom we met in Campus and shared a room for four years. James has a sharp mind and actually studied at Alliance High School. He was extremely good in anything science and was quite a fountain of knowledge. I remember one time he made me understand Schrödinger equation; some crazy equation in quantum mechanics. He also was a local grandmaster in chess and taught me how to play the game. I only beat him once in the four years we played numerous matches; and I guess he was sleepy. He was lucky to get a job as a systems developer a month after clearing our undergraduate. His employer wanted some more developers and James invited me over and soon we were crunching codes together for a meagre 20k pay. Back then we had loads of passion for the job and we could work overnight and on weekends in the name of making the codes work mostly at the expense of our social lives.

Despite his sharp mind in as far as formal education is concerned, I had started noticing some fundamental flaws in how he was dealing with money issues. He used to borrow me cash and rarely would we reach month end before he asked for a few coins. I once advised him that we join a Sacco but he said whatever we were earning then was too little. One day I convinced him that we go view some plots that were being sold in Syokimau by a land buying company. Back then the area was sparsely populated and you could even see some gazelles and antelopes and the plots were going for a paltry 100k, approximately 2 km from Mombasa road. He returned a verdict that the area is too remote and in any case we could easily get conned by the sellers. I bought one which I later resold for 600k. After 8 months of developing software, I got another job with a bigger corporate and soon after we lost contact with James.

Fast forward: The next time I saw James was 5 years later (2009) when we met at a house warming bash for a former classmate in Campus. When I saw him he looked much older and with a small pot belly. He was now a married man with two kids. While we were enjoying the meat, drinks were served and I noted he was happily taking some Tusker. That was quite strange because the James I knew was a CU member and he never used to partake of the Ruaraka waters. When I asked him what happened, he coyly said that problems engulfed him and he normally drowns his sorrows by partaking of that stuff; that way he forgets his problems a little bit. I was curious to know what his problems were and I knew after taking several bottles, he would open up. I long stopped taking beer and James would never stop teasing me that the reason I stopped was to get rich. By the end of the evening, I had noted that James was in deep financial crisis and a mountain of debts (his own words) had engulfed him. I knew that this long lost friend needed help. I therefore, proposed to him that we meet over coffee in a few days since he was already drunk and soon after he was not even coherent in his speech. When guests started leaving, I jokingly told him to stop taking more beer because he needed to drive himself to his place. He laughed aloud and informed me that his jalopy let him down and refused to start so he had used a matatu. I offered to drop him at his place and my parting words were we link up three days after and discuss his crisis further.

We finally met over coffee and he set the ball rolling. In front of me was a dear friend, who had never moved from his first job, was extremely frustrated by his boss and was no longer enjoying what he does. He recounted how he has had numerous pay rises to take him from the 20k as a fresh graduate to 80k, within a period of 6 years. And so I asked him in his own words what his problem was.

He said “Joshua (the boss) has given me those pay rises but interestingly I did not feel them as the cost of living seemed to have consumed them. In fact am living worse off than I did when I first got employed. An analysis of my pay check is quite interesting. I earn a gross pay of 80k. The obvious deduction is PAYE (pay as you eat of 22,000), then of course the statutory deductions (NSSF and NHIF), they also deduct HELB loan (5k), car loan(6k), a deduction of 7k of an unsecured loan that I took and attempted a side business that collapsed soon as after starting. The loan balance stands at 150k. This leaves me with a net income of 39,400 which is approx. 50% of the gross pay. Once I receive the net pay in my account I immediately pay my rent (13,000) & electricity & water (1000), school fees for my kid (3000 per month), then we do family shopping (8,000). The rest I fuel my car, repay some soft loans from friends and deal with any miscellaneous expenses within the month. Of late even fuelling my car has been a burden so I am forced to use it occasionally on weekends. As you realize, I have no allocation for entertainment because there is simply no money. I also have to deal with relatives who keep asking me for money (they educated me) as well as my in-laws who are not doing so well financially. Neither do I save any coin, in fact am forced to borrow before end of the month sometimes to deal with basic expenses. I wish I’d be able to save some money maybe in a Sacco and I’d want to do my masters. I also would wish to buy a plot for future development of the family home. I also need to have some cash for future school fees for my kids (one is already in school and the other is almost).My wife would have assisted me but she is not employed. How do I get out of my predicament and achieve financial freedom?? Please help me”

A careful analysis of this fellow indicated that he was clearly in the rat race though he was willing to get out of the mess. This is an above average Kenyan going by his earnings. He failed to catch the little foxes, and they have ended up ruining his vineyard (Songs of Solomon 2:15). With a little bit of adjustments here and there, this fellow can get out of the mess and progress up to a point where he achieves financial freedom. Some if not most of us can identify with him and his shortcomings.

I probed James a little bit and I found out that he had the following glaring flaws:

1.            He never had a clear budget and he had no grip of his expenses beyond the obvious ones. Like I noted he even forgot they buy gas, the have a house help, he eats lunch while at work, he takes beer that he buys etc.

2.             He was certainly living beyond his means evidenced by growing mountain of debts.

3.             He had no financial goals and plans.

4.             He was not saving / investing even a dime.

5.             He was no longer enjoying his job. Lost all passion.

6.             He was escaping from realities and drinking himself silly.

7.             His expenses kept rising with higher pay, so he had a bigger problem than money.

So we agreed we will embark on a road to financial freedom and he was willing to play his part. We agreed that the easiest thing he must first do is to understand his spending, because therein was one of the little fox that he had to deal with. A very simple exercise we identified was to religiously jot down his expenses at the end of each day irrespective of how small they were. The exercise was to be done for two months. The importance of the exercise was to identify the holes in his pocket that he thought he had. 

The next lesson will focus on what the expenses tracking for the twomonths revealed. It was quite a discovery for him.

Which class of a person are you?

Guest post by Samuel G. Njenga

Are you always struggling to meet your expenses and constantly in debt? Does your expenses rise with more income? Do you realize that more money won’t help you? Sorry, you are on the wrong track (rat race) and it is time things must change.

OR

Do you endeavour to minimize your expenses column and built your assets column. Do you constantly ensure that you are acquiring more money-generating assets? Then you are on the right track (fast track). Sooner or later, money will work for you if at all it is not currently doing so.

When we say asset the number one thing that comes to most peoples' minds are personal 'assets' e.g. Household items. So, what is an asset? 

By definition, assets are economic resources (tangible or intangible) that are capable of being owned or controlled to produce value and that are held to have positive economic value. Simply stated, assets represent ownership of value that can be converted into cash (although cash itself is also considered an asset).

Examples of intangible assets: copyrights, goodwill, , trademarks, software, patents etc.

Financial assets: stocks, accounts receivable, bonds etc.

Current assets: liquid cash and its equivalents (currency, deposit accounts, and negotiable instruments like money orders, cheque, bank drafts), receivables, pre-paid expenses, inventory etc.

Fixed assets: land, buildings, machinery, furniture, tools, equipment.

Now to the contentious issue: Your own house and the households therein are not for sale. And whenever you sell any of these, you'll most likely replace them with another. In essence you'll always have a house and household items all the time and they are not held for sale and they never generate income. Look at the house you live in, it actually consumes money to maintain and it does not generate money at all, and whenever you'll sell it, unless you plan to stay homeless you'll most likely acquire one at market value then. This is very different from a unit you built for rental purposes.

In a nutshell, an asset generates income periodically and / or will generate positive economic value at the point of disposal. So it could have the two attributes or at least one of them.

A common question, what, in your own opinion and even in general would be classified as luxuries?

This gets tricky my friend because by definition luxuries are products and services that are not considered essential and are associated with affluence. This definition is very general and in most cases subjective because, what you may consider a luxury maybe considered essential to somebody else. But let's understand luxury from the economics perspective. Economically where you are, there is what we'd consider a luxury, and that is basically something you can do without. Take for example, a guy who works in a mjengo (construction) site cannot afford to buy meat daily. At his level of income meat is a luxury which he can do without because if he insists on having it daily then, he'll do so at the expense of paying rent. Fast forward, the same guy gets a better job and can thus afford himself meat daily but he cannot be able to buy three beers for himself on a daily basis with the new income, at that point daily drinking becomes a luxury.

So, other than the generally accepted luxuries like Zanzibar holidays and the like, luxuries shift with economic levels. The big deal is being unable to analyse luxuries at your current economic level.

Next lesson will be on simple and practical things that can help the fellow in the rat race. You can never invest if you are in the rat race because all your money will always be taken up by the ever rising expenses.

Activating that financial genius in you

Guest post by Samuel G. Njenga

All of us have financial geniuses in us irrespective of our levels of formal education. That is why one Njenga Karume (RIP) made it despite not having much to show in terms of formal education; he had a financial genius and business acumen. The biggest problem is that we are not bold enough to activate the financial genius in us because of lots of reasons but the biggest is the fear of failure. It is not the fearful who are rich but the bold. We must therefore overcome the fear factor.

At some point, you had a wonderful business idea. You kept thinking, suppose I try and I fail?? Learning to manage risk is far more important than playing safe when it comes to investments. My first major business venture was farming wheat in Narok. I was employed and relied heavily on a farm manager whom we had employed together with other investors. We used to make trips every weekend to check out the farms but as fate had it, rains failed and we lost everything. Second season, we invested in the same venture and the wheat did well and we were awaiting a bumper harvest, then again the rains were too much at the time of harvesting. Of course we lost again. In total I personally lost 600k and you can imagine the feeling especially for a young man earning 40k per month because even raising that money was quite something. We never lost hope but learnt very important lessons. We did a third season and recovered all the losses of the first two seasons. It is extremely important to understand the business and whenever a failure comes (it is usually inevitable), learn the lessons and move on.

But how do I start, you may ask??

You need a reason greater than reality. The power of spirit, what I’d loosely call great conviction. The reality will tell you that the road seems too long and too many hills to climb. It is just easier and comfortable to work for money than to make it work for you, after all that is what they taught us in school.

You must choose daily how the shilling that lands in your pocket will be utilized in future to either be rich, poor or middle class. That is the power of choice. Cumulatively these choices determine your destiny. Do you ever wonder why two people employed at the same time and earning the same amount never progress in parallel as far as achievements are concerned?

Choose friends who reflect what you want to be in the future or people who share your vision. Don’t listen to poor, frightened people who think that money is a preserve for some people. Have a critical look at your closest friends. Do you know they are a reflection of who you are? What do they feed your mind with? Today is furahi-day, are they calling the whole day in excited tones waiting close of business to go on a drinking spree the entire weekend. I am not against drinking because some deals occur in those places, but if you were to analyse how you spend your time, then you’ll have a clear indication of the effects friends are having on you. The power of friends.

Pay yourself first as in set aside some cash for savings / investments before you deal with all other bills. Personal discipline will ensure that you pay yourself first before paying others like government, rent etc.  If you pay everyone else first then there may be nothing left for you. Keep expenses low; ensure that your assets column keeps rising. By the way an asset generates income, so the house you are living in is not an asset (a story for another day), neither is that car that you use to go to work (this is rather obvious).

Pay brokers well. These are people who give you good advice. Pay them better than others and they’ll always offer better advice and will consider you first. This is very practical in real estate. I have a network of brokers who will always call me first when they come across a good deal.

Assets buy luxuries. Strive to buy assets that generate money and they will buy you luxuries. Never buy luxuries out of your ordinary income, say a monthly pay check.

Have heroes. People you want to emulate. Learn how they think, do their stuff and learn from them. Personally, I like those guys who have made money honestly through hard and smart work, shrewd investments and are street smart.

Be charitable. Give and you shall receive. Give free information and teach other how to make money. It’ll become a part of your life. Giving back to society can give a lot of satisfaction and of course God will bless you a hundred fold.

By the way, which class of a person are you? Let us try to answer that in the next post.

That Millionaire next door

Guest post by Samuel G. Njenga

Believe it or not, one of the most important indicators of whether you can become a financially free is how you think. Yes, a large part of financial success begins with your mind.

What are your thoughts about money and wealth? Do you think like the wealthy millionaire next door?

Millionaires are not afraid to take risks

Many of us fear change and would rather settle on the easy path - the path of least resistance. This path will never lead to wealth. Millionaires are millionaires because they do things differently from most people. They are willing to take risks (calculated ones) and responsibility for whatever the outcome.

Millionaires are positive thinkers

This does not mean that they deny that things can go wrong. It just means that by default they expect things to work out. Millionaires are realistic positive thinkers.

When they create a plan, they anticipate what might go wrong and develop a strategy for coping should that plan go south. This way they decrease their level of failure. And their high success level reinforces their assumed expectations that things will work out in the end.

Millionaires cope well with failure

Failure is an inevitable stumbling block on the road to success. Every millionaire has failed at some point, and because they play with high stakes, they've probably had some very big failures. A case in point is one Donald Trump who was 900 million in debt at some point.

However, the difference between millionaires and most people is that they don't dwell on their failures. Instead, they accept them as part of life and make a point of learning from them.

They are creators, not victims

Millionaires don't passively sit around accepting whatever happens to them. If they're not happy with their current financial situation, they take action. For example, when they lose, it's highly doubtful that they spend all their energy dwelling on how much money they lost and how they'd never get it back. Instead, they are most likely thinking, "What do I need to do to right now to create enough money to be a millionaire again?"

Millionaires are leaders

A follower doesn't typically come up with a million dollar business idea. And if they do, chances are they won't act on it. Millionaires think like pioneers. Their minds are always open to the next great opportunity they can turn into a reality. And once they have an idea, they effectively harness the energies to materialize it.

If you want to be a millionaire, you should begin thinking like one. Your mentality colors your entire perspective of the world. And once you begin seeing possibilities where you once saw dead ends, you'll be surprised at how much abundance there really is to go around.

Note: We will get practical in this journey to financial education. For now we are just dealing with basic but very important concepts. For practical lessons, we will also be relating to the Kenyan scenario(s) so as not to sound theoretical. Just to caution readers that the we have a bias to real estate and most of the topics will revolve around it in future. However, other important topics like financial planning, chamas (Investment groups), Life insurance, leveraging on borrowing amongst others will be covered in due course.

In the next post, we look at activating that financial genius in you.

How To Successfully Achieve Any Goal

Goal setting involves establishing specific, measurable, achievable, realistic and time-targeted (S.M.A.R.T) goals. On a personal level, setting goals helps us work towards our own objectives—in all aspects of life (spiritual, health, family, career, business, financial-based goals etc). Goal setting is therefore an effective tool for making progress by ensuring that you are clearly aware of what you want in life. "Goals provide a sense of direction and purpose" (Goldstein, 1994, p. 96).  

Without goals, many people live life adrift thinking that life happens to them, instead of taking control and directing their lives towards a certain direction. When I was in Second Year of High School, I made a decision I wanted to become a scientist, and therefore needed to join in the university. I wrote my goal down under the cover of my every note book in school. I studied hard despite being in a "not well performing secondary school". I went out of my way, learning ahead of the teachers to finish the syllabus especially for sciences and mathematics, as the system never used to cover the syllabus. Come the National 4th Year Examination, I passed, and was granted a government scholarship to study in one of the Kenyan public university. That time, there was no parallel-degree programs offered in the four public universities in the country. There was only few very-expensive private universities. So, if you came from a peasant background and didn't make it to the cut-off mark, you were basically locked out of the tertiary education system. 

As I write this post, I am scheduled to defend my PhD by the end of next month. I think that attaining a PhD is a peak in my career advancement, which has set me on a path of becoming a great scientist.

That is the power of goal setting. It starts with knowing what you want. Once you know what you want, realise that God has already given you the ability to become, attain, achieve, acquire that. A person with a goal is quickly able to identify opportunities when they come his way. "Goal setting capitalize on the human brain's amazing powers: Our brains are problem-solving, goal-achieving machines. "Napoleon Hill said "Whatever the mind can conceive, and believe, the mind can achieve". 

"Goals convert the strategic objectives into specific performance targets. Effective goals clearly state what, when, and who and are specifically measurable." 

On the side, my wife and I have been pursuing another goal: To promote Financial Education for Poverty Eradication in Africa (reason behind this blog and facebook page), alongside another personal goal: To create a total of X USD in passive income per month that can give me the lifestyle I want even without working by the age of forty five. This means, once I achieve this goal, I can retire the following day, if I want to. Do you get my meaning?

As you watch the video below, let me ask you, what are your life goals?

Download a FREE on How to Successfully Achieve Any Goal.pdf courtesy Personal Excellence.

In the next post, we shall look at "That Millionaire next door".

How To Prepare A Personal Balance Sheet (Networth Statement)

A Personal balance sheet, also called a net worth statement or statement of financial position, reports what you or reports what you or your family owns and owes. This statement provides a summary of assets and liabilities that one has at a particular time. So, whenever you want to find the state of your finances, this statement will give you an answer. It will tell you whether you are doing good or bad.

This is how you go about preparing a personal balance sheet:

Step 1: List What You Own (Assets)

Do you have anything of value? List it here. Cash (at hand and in the bank) combined with other items of value are the foundation of your current financial position. Assets can be grouped into four:

• Liquid assets

These are cash and items of value that can easily be converted to cash. Money in current and savings accounts is liquid and available for current spending. Surrender value of some insurance products such as endowment assurance policies can be borrowed if needed.

• Real Estate

Includes a home, rental buildings, or a piece of land that a person or family owns. The current value (also referred to as market value) of these properties needs to be determined by qualified Property Valuers or Appraisers.

• Investment assets

These include investments such as stocks, unit trusts, bonds, treasury bills, and any business you own. Since investment assets usually fluctuate in value, the amounts listed should reflect their value at the time the balance sheet is prepared.

• Personal possessions

Motor vehicles and other personal belongings such as furniture, home appliances are in this category. While these items have value, they may be difficult to convert to cash. They can be listed in the balance sheet at their original cost. However, their values need to be revised over time, since a three year old car, for example, is worth less now than when it was new. Some other personal items might increase in value such as rare jewelry thus you may wish to list such items at their current value.

Step 2: Determine Amounts Owed (Liabilities)

Liabilities are amounts owed to others but do not include items not yet due, such as next month’s rent. Liability is a debt you owe now, not something you may owe in the future. Liabilities fall into two categories:

• Current liabilities

These debts must be paid within a short time, usually less than a year and includes items such as utility bills, medical bills, insurance premiums, school fees arrears, cash loans and credit card payments.

• Long-term liabilities

These debts are usually paid in full until a year later. Common long-term liabilities include auto-loans, educational loans, and mortgage.

Step 3: Calculate Net Worth

A net worth is the difference between total assets and total liabilities and it provides a measurement of your current financial position. Net worth is the amount you would have if all assets were sold for the listed values and all debts were paid in full.

Two things you should know about Net worth:

1.     If the total value of assets is larger than the total value of liabilities, you will have a positive net worth. However, your net worth is not money available for use but an indication of your financial position on a given date.

You can increase your net worth by:

§  Increasing your savings.

§  Reducing your spending.

§  Increasing the value of investments and other possessions.

§  Reducing amounts you owe by paying off your debts.

Please do understand that you may have a positive net worth and still have financial difficulties. Having many assets with low liquidity means you do not having the cash available to pay current expenses.

2.     If the total value of liabilities is larger than the total value of assets, you will have negative net worth which means you are unable to pay your debts when they are due.

I believe you can now prepare your personal balance sheet. Most personal finance management software’s (e.g. budgetpulse.com) has an integrated net worth function. Make it fun to discover how much you are worth. If you find you are positive, great, focus to increase your net worth. If you find out you are under water, do not despair. Set a goal to get out of debt and improve your financial health.

Our next post will look at setting goals.

Budgeting - How To Manage Your Finances With A Spending Plan

Personal budgeting is about managing your finances through a spending plan. It is one of the effective ways of achieving your financial goals and dealing with most of your money problems. Do you sometimes wonder where your whole income has disappeared to even before mid-month? Or some days you leave for work in the morning with some cash and in the evening your wallet or purse is empty. You have no clue as to where your money has disappeared to. You just don't want to admit you squandered it. Or, someone just borrowed you for ‘not so urgent needs’ and you gave it, because for you, it is just money, and not so valuable.

Likewise, do you get frustrated by your inability to achieve your financial goals because you can't find money to get to it? No matter your good intentions to set aside some money every month towards savings, you always find yourself with nothing. Probably your expenses are higher than your income, meaning that you are living above your means, and simultaneously accumulating debt (the money has to come from somewhere to fill in the gap). You need to start using a monthly budget (spending plan) and you will be amazed on its power to help you live within your means. Likewise, you need to find ways to make more money, if what you earn is not enough to take you round the month. Note, there is no income that is so small that it cannot be budgeted for.

The main purpose of preparing a spending plan is to help you:

• Live within your income.
• Stay out or get out of debt.
• Spend your money wisely.
• Reach your set financial goals.
• Prepare for financial emergencies.
• Develop wise financial management habits.

Steps To Preparing A Personal Budget

A personal budget means matching the income one gets with the expenses, in order to reach the financial goals set in advance. Preparing a budget is not that difficult, but still it could become a hassle. Try to make it as simple and as easy as possible, and you will find the personal budget a great tool for keeping your finances under control.

Step 1: List And Total Your Monthly Net Income

Total up every net income you receive in a month. The income should include all of the resources, such as monthly salary, earnings from interest, earnings from rent, business income etc. Bonuses, gifts, or unexpected income should not be considered until the money is actually received. It's better to have money left over than be caught not being able to pay your bills because you factored in money that you weren't sure you'll receive. My wife and I personally use such out-of normal month income towards building our emergency fund.

Step 2: List And Total Your Current Monthly Personal Expenses

The expenses should include all spending - purchases, monthly bills, insurance, hospital bills, savings etc' List all your monthly expenses as they are now. Include also weekly, quarterly, semi-annually and annually expenses. Do not forget discretionary expenses such as Books, Magazines, Entertainment, Impulse purchases, Snacks, Dining, Vacation and Travel and Membership fees. You can know how much to allocate these if you track your expenses for several months, and then use the average as a guide.

Step 3: Subtract Your Current Expenses From Your Current Income

Take the total current expenses and subtract the sum from the total current net income. If, on paper, you have money left over but in reality you are living close to the edge or falling behind, then you have not accounted for everything or some of your figures are wrong. Examine your budget for inaccuracies and make corrections. Use of a budgeting software like dsbudget can help a lot. I personally prefer a software that is web-based like budgetpulse.com, so that I can upload data wherever I am (including on the go using mobile phone).

Step 4: Identify Where To Make Changes In Your Budget

Once you have an accurate idea of where all of your money is currently going it is time to make changes for the future especially if there is more going out than is coming in. Your options include increasing your income, decreasing your expenses by simplifying your life, or a combination of the two.

As you prepare and make the changes in your budget, do not forget to include money for your financial freedom account (FFA), or purse fattening account (PFA), creating an emergency fund, paying for personal loans and credit card debts, insurance premiums and retirement. After you are through matching your income and expenses, monitor your progress every month.

Our next post will look at personal balance sheeting.