Personal Finance

Personal Finance
by: Rina Karina, 2 Apr 08
Sometime this year after I made a presentation on the stock market to some 200 or so men, I got a question from one of them asking how I could talk about investing money when a lot of Kenyan's lived from hand to mouth. He said that the average Kenyan's concern, was not stocks, bonds, etc but where their next meal would come from. His comment saddened me a great deal as it made me realise that a lot of Kenyans don't think about saving as a necessity but rather an activity carried out by the wealthy.

David Ithanya, in his book, The Winners & Losers of Capitalism; and why Africa is not winning yet, states "Africa's problem lies more in its collective attitude, collective outlook and collective mindset. It is the expectations that Africa has of itself, that are terribly low. It is Africa's collective sense of self worth and self belief, which unfortunately, sometimes seems to reside only in rhetoric."

It is important to believe that we as a nation can solve our persistent and pressing problems without the assistance of foreigners. We as a nation and as a continent must find our OWN solutions to our pressing problems. It is my firm belief that when we begin to make a difference in our thinking and personal finance, we will affect the economy of the nation.

Kanjii is a great friend of mine whose view on personal finance is refreshing in its simplicity and practicality. The reality is that successful investing is not difficult at all. It's just intimidating. You don't have to understand all the ups and downs of the Stock Exchanges in the world, the interest-rate decisions by the Central Bank, economic indicators and so forth.

All these things have significant meaning but you don't have to follow them all to invest well. All you really need is to have an understanding of several facts and be confident in yourself as you begin. Ever heard of the three baskets of success? Kanjii introduced them to me and I think they're a brilliant way to group your financial goals.
The first basket of success is the Security Basket. In this basket are finances sufficient to support your current expenses: food, rent, clothing, entertainment, fuel, and so on. You also need to keep at least 3 to 6 months of your income as "damage management" or "just in case" funds. This money needs to be in the bank or in marketable securities such as the Money Market fund or Treasury Bills that are easily and quickly accessible.

As you fill this basket, you would need to consider what your current financial situation is. Are you in debt? Do you have a car loan or a mortgage? Are you planning a wedding? Going back to school? Planning to have children? And so on... You should at least have the basic life insurance that covers you and your family in case of terminal disease, death and accident. This is very important as even though you might lose all your money in an investment, if you need medical attention, it will be taken care of. The size of your security basket will depend on your current financial needs.

The second basket of success is the Investment Basket. Making deposits into this basket should be done once the security basket is full. The investment basket will have the kinds of investments that should provide you with the money that you will need to meet the needs that you expect to have in the future.

Most people have more than one investment objective: a secure retirement is almost everyone's long term goal, more immediately pressing goals are: a down payment on a house, or a child's college education. In this basket you would have both short term and long term assets: stocks (or shares), bonds, bills, real estate, unit trusts, and so on...

You would need to calculate how much you will need to set aside in order to make these investments. The single most important thing you will need to do to ensure that this basket is filled is to live below your means! If you want to be able to invest and accumulate wealth to help yourself or others in the future, you simply cannot spend everything you earn.

All three baskets of success will be fuelled by savings... It's never too late to become disciplined about saving, but the sooner you develop the saving habit, the easier it will be to achieve your goals. You can start by creating a budget for the New Year: no successful company would establish a profit goal without estimating its operating costs in advance.

The same goes for individuals: if you want to free up enough cash to save the recommended 10 to 15% of your pay in 2007, you have to control your costs. Your number one goal should be to do a budget, keep track of your expenses for a couple of months. It's the smaller expenses like clothing, movies, phone bills and coffees that slip through the cracks and before you know it, there's not much left for savings.

Authors Thomas J. Stanley and William D. Danko in their book the Millionaire next door wrote:
How do you become wealthy? . . . It is seldom luck or inheritance or advanced degrees or even intelligence that enables people to amass fortunes. Wealth is more often the result of a lifestyle of hard work, perseverance, planning, and most of all, self-discipline.

Below are a couple of saving tips that you could use:

• Set aside any salary increments. If for instance at the end of this year you're given a salary increment of 10%, your cost of living doesn't change and your expenses shouldn't. Save that extra money every month like you didn't have it. An easy way to do this is to sign up for an automatic investment program, such as Old Mutual or British American unit-linked savings products.
• Cut your expenses. If you can defer making big payments e.g a new car while your current one is running ok albeit old, don't.
• Try monitoring your spending for a couple of months. Keep a spreadsheet and enter your expenses every day. When you itemize your expenses, it becomes easier to see where you can cut down

Louis R. Morrell, Basics of Investing, gives a distinction between saving and investing. Saving is a relatively short-term activity designed to provide a set amount of money at some point in the future, usually for a specific purpose such as buying a car. The major goal in saving is to avoid the risk that the amount objective will not be achieved.

Savings are liquid (easily converted into cash) and are usually used for such things as emergencies, down payment on a home, or a holiday. In contrast, investing is a longer-term in nature with the individual willing to accept more short-term risk in the expectation of achieving a greater long term gain. The goal in investing is not capital preservation but rather capital appreciation.

The dream basket is the third basket of success. In this basket you would have all the things that you don't need but would love to have... a yacht, a cruise around the world, a trip to the moon, a second home, or the latest Aston Martin! It is important not to have these baskets in the wrong order...

I hope to continue increasing financial literacy and letting the public know that you can indeed create wealth! It's just like Henry Ford statement, "the man who thinks he can and the man who thinks he can't, are both right; which one are you?"