FINANCIAL RULES TO LIVE BY
These will be a series of blogs on the lessons i have learnt on my journey to financial independence. On writing some statistics may not be available but will attach as i get them
Live below your means
Regardless of how much one earns, if you save a portion of it, you will be able to build wealth and have the ability to retire early or earlier.
Keeping up with the Juma’s and the Njoroge’s is a never-ending vicious cycle. We do what we need to do. We work hard, we get a great job, we save, we put away for retirement. The more money we make; read the more successful we seem to be, the more our expenses increase. The cars get nicer, the hangouts and dates get trendier and more exclusive. If you have kids, they have to go to certain schools, wear trendier clothes and we have to live in certain neighbourhoods. Are we really getting ahead?
Chances are that most African middle class live from pay check to pay check, from loan after loan. Personal finance discussions are rare, so even kids and young adults are going to follow the trend unless something changes. This will eventually become circle of life from one generation to another. Which leaves me wondering are we winning in life? My thought, keeping up with the Kamau’s and the Otieno’s is a reward given in our society but it prevents families from retiring years or decades earlier than they would have. What do you think?
Lets use take the example of two couples; couple A Otieno, your typical Kenyan ( African) middle class and Racheal and couple B Njeri and Mshindi.
Couple A are high income earners, they have a beautiful house; bought with an approved loan from the bank. The rule is 30% home affordability which means, monthly payments make up less than 30% of their gross income. They drive cars that you would expect to see them in given their high social status; i.e. nice, safe , reliable. Their combined income is Kesh 30,000,000 (About $300,000) annually. They save the minimum necessary as per government regulations. They have a good employer who matches their contribution whoever they save the minimal for the employer to match their contribution. Which is not too bad.
Couple B have a combines household income of Kes7,000,000 (about $70,000) annually. They save 20% of everything they earn, and have done since they entered the workforce at the age of 25. They have Kes 517,5000 (about $51,750) saved for retirement. They consistently save between Kes 60,000–70,000 (About $6,000-$7,000) every year. We assume that they saved 10% of their combined annual income until the age of 32. Then they saved 20% of their combined annual income.
However, Couple A do not know when they will retire. Now you are thinking the incomes/expenditure numbers are the more important ones, but when you calculate the savings rate that is when you really get to know who is really winning at life. It also helps you to know when you will retire.
Savings rate is the amount you are saving every month as a percentage of your take home income.
To calculate your saving rate, you need:
1. Your income (what you take home)
2. Your expenses,
3. Multiply the number by 100 to get the percent.
