Will you get me out of the rat race: Part 2

Flashback: James, my good friend was to religiously jot down his daily expenses so that we properly analyse his spending habits.

I made a conscious decision not to contact James so that I gauge his desire to achieve financial independence. Exactly a week before the two months elapsed, he called me and he sounded very enthusiastic. It seems he had some interesting info for me.

I had devised a strategy to make him understand the need to manage his expenditure. On the material day we were to meet, I requested to pick him and we did a drive along Kangundo road all the way to Kamulu. I took him to meet another great friend called Musyoka at his home just a few meters off Kangundo road. This fellow Musyoka has worked as a messenger for one of the UN bodies for as long as I knew him. Musyoka is calm and collected and talks very little rarely giving away any info. He however took us round his homestead and James could not help but notice a very nice Massionette built on a 5 acre piece of land and behind it some green houses and further down he had some very healthy dairy cattle (around 30 of them) goats, and sheep (around 100). Musyoka also had around 800 layers and a few ducks. Towards the end of the farm was a fully equipped borehole and some huge raised tanks. After going round the farm we were given a cup of tea and soon after we left the farm as Musyoka was headed for a church meeting. We decided to get into Mwalimu farm and drove all the way up to some place where there are some waterfalls.

Seated on a rock and enjoying the breeze, I recounted how I ended up knowing Musyoka several years ago after I went looking for land in Kamulu. I learnt valuable lessons from him by way of just observing him. Being a messenger and having achieved so much was astounding to say the least. He was a man of meticulous plans laid down in very specific details. Musyoka not only owns the 5 acre farm he lives in but several other tracks of land off Kangundo road. James could not believe it especially the messenger part. This was a classic case of man in control of his life despite meagre earnings, a man who had carefully planned his finances and achieved enormous success. I was just setting the right tone for James before taking him to task on the assignment we agreed he’d carry out.

So I told him to take me through the findings of the analysis of his expenditure. This is what he had to say:

“I embarked on the exercise and religiously accounted for every shilling that left my hands. Surprisingly, over and above the obvious expenses I noted that I actually spend my cash on so many items that I was shocked at some of them. Remember I had told you about the following expenses: Helb Loan 5k, car loan 6k, unsecured loan repayment 7k, rent 13, electricity & water1k, school fees 3k and shopping 8k.

The other expenses which are an average for the two months that I confirmed were quite eye opening: car fuel 3k, soft loans from friends 4k, extra food purchase at home: 2k, gas 3k, house help 3k, daily lunch in the office 2k, relatives 3k, transport to work whenever not using car 2k, wife’s errand and other personal expenses 3k, clothing for family 2k, entertainment 3k and other miscellaneous 2k. In other words, my expenses add up to 75k and mind you I earn a net of 58k. In essence there is a deficit of 17k or thereabout every month. How I managed to survive like this only God knows. I know you are about to tell me that I live beyond my means. To demonstrate how serious I have become I have decided to do a budget that fits the 58k that I earn and here it is:”

Helb Loan                              3k (I intend to renegotiate the 5k this with my employer and HELB)

Car Loan                                4k (I hope to renegotiate with employer for period extension)

Unsecured Loan                  7k

Rent                                        13k

Elec and Water                     1k

School Fees                          3k

Shopping                               6k

Car fuel                                  2k

Soft loans                              2k (until I clear all of them)

Extra food                              2k

Gas                                        3k

Office Lunch                         1k

Relas                                     1k

Fare                                        1.5k

House help                           3k

Entertainment                       1k

Wife personal                       2.5k

Clothing                                 1.5k

Misc.                                       1k

Total:                                      58.5k

I could clearly see that my good friend had acquired a burning desire to get things right. The positives I lauded in his budget were as below:

1.             Reducing the debt (albeit slowly).

2.             Living within his means (albeit consuming all his net).

3.             A comprehensive budget that covered nearly 100% spending.

However, I also pointed out a significant missing item which was car insurance and maintenance. I went ahead to propose the following steps to further improve it:

1.             It was a hard sell but I advised James I never saw the need of him having a car at that point in time. The jalopy was quite old and despite consuming fuel and maintenance (which the budget omitted), it was courtesy of a loan. It was the type that would easily demand you employ a permanent mechanic due to frequent failures. Take note that if this jalopy is sold even for a mere 300k, the amount can offset the car loan balance and eliminate the loan repayment expense as well as fuel; would that amount to killing 3 birds with one stone despite the inconvenience of life without a car? I however promised him that with improved finances, he’ll buy a car at a later date.

2.             Wouldn't the balance arising out of the car sale repay the expensive unsecured loan? This gets painful coz he was to repay a loan which the fruits he never enjoyed. And by the way, he was due to explain to me what happened to the business that flopped. That is a lesson for another day.

After much cajoling, he agreed to sell the car though this happened 3 months later. For those 3 months he was forced to go by his budget; after all he owned it.

James saw the sense in what he was doing and after the car sale, his budget was as below:

Helb Loan                              3k

Rent                                        13k

Elec and Water                     1k

School Fees                          3k

Shopping                               6k

Car fuel                                   2k

Soft loans                               2k

Extra food                               2k

Gas                                         3k

Office Lunch                          1k

Relas                                      1k

Fare                                         3k

House-help                            3k

Entertainment                       1k

Wife personal                        2.5k

Clothing                                  1.5k

Misc.                                        2k

Saving / investment              8k

Total:                                       58k

When we met after the car sale, he looked jovial and bubbling with a bit of energy and did not display any annoyance arising from using the matatus or route 11. Of course I had a reason to celebrate. After all, I saw an item that generated quite some discussion. The saving / investment item of 8k was something that in a small and big way showed that James had overcome a very big hurdle. I could not believe it when he asked me what to do with that 8k. I threw the question back to him and asked him what he thought was a good thing to do??

At this point please note that James had already dealt with several little foxes namely:

1.             He certainly had a grip of his expenses.

2.             He was certainly living below his means and had dealt with troublesome debts.

3.             He was now saving / investing 8k per month.

4.             Any future pay rise I’d bet my small toe that it’d go towards further investments.

Those who know about budgets will tell you, the budget is nowhere near a perfect one but at least James was getting somewhere.

By the way, even his drinking was no longer targeted at drowning his sorrows but to entertain himself.

However he still had no clear financial goals and no set targets. His net worth was now near zero (at least he was almost crossing towards the positive net worth).

Next chapter will be on what he decided regarding the 8k per month available for saving / investing, how he set goals, short and long term. I also taught him how to calculate his net worth. With the 8k, he seemed aimed at paying himself first. A turn around for him but he still has a long way to go. I wondered whether he had started enjoying his job but I decided I’ll ask him that much later. From deep inside my heart, I wished him well in his journey of a thousand miles that he’d only taken the first few steps. I hoped that he’ll enjoy the walk and live to tell a story.

Advice: The best thing about investing while young is being able to make mistakes that will not kill you financially. Great and successful business people, show early signs even while in school. Did u know that Njenga Karume used to sell books to his mates? He could source for them at a cheaper price and sell at a price lower that the school canteen.

Back then when we were in High school, we used to buy a full loaf at 14 bob, cut it into 4 pieces and sell each at 5 bob. It was therefore easy to survive despite getting very kidogo pocket money.

People also underestimate the power of investment clubs. I joined one when we were bachelors 6 year ago. The club was converted into a real estate company and we now sell plots and also build units for sale. The future looks really bright for our group.

In the next post, we shall see what practical investment options my friend came upwith.

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.