Once we come of age and start going to school, our parents or guardians will insist on working hard so that we can go to the best secondary schools; get good grades that will enable us to do great courses that are well paying so that we can become rich. From that early age, we are taught to do our best to become rich but we are not taught how to do it. Unfortunately, not everyone gets good grades and not even everyone who gets good grades goes on to become rich and not everyone who becomes rich goes on to become wealthy. Likewise, some of those who got poor grades go on to become rich or wealthy.
Contrary to popular belief, being rich is not the same as being wealthy. Rich people have a lot of money or make a lot of money but they work for the money. This means if they stopped working, it would take them a few months to be broke or they may need to adjust their lifestyles. Wealthy people have money working for them. If they stopped working today, they do not have to worry about being broke in the near future.
Someone who earns Kshs. 500,000 will most likely be rich. If his expenditure is say, Kshs. 475,000 or even closer to the amount he earns, it will take very long for him to be wealthy. On the other hand, someone who has assets worth Kshs. 1,000,000 and his expenditure every month is Kshs. 10,000 can be considered as wealth since it will take about 100 months (8 years) for him to use all the assets he has if he never works. In short, being wealthy has more to do with the assets one has amassed viz a viz his expenses.
How can one become wealthy? Apparently, it is not so hard. It just requires a bit of discipline. You can even start working towards being wealthy in college or University. Recently I learnt of a simple way of becoming wealthy that I wished I had learnt 10 years ago. The simple way is that of any income one gets, take out 30% and use it as follows:
Ideally, the savings are not for a rainy day, but for a stormy hurricane day when if the funds are not accessed, then lives can be lost – Finances: The Importance Of An Emergency Fund. Consequently, they should be easily accessible but not too easily accessible. Those with discipline can put them in savings bank accounts. Different banks have different savings accounts products whereby the number of times one can withdraw the money is limited over a certain period of time.
The rationale for giving to charity is simple. Giving back to society makes one feel good about themselves. Moreover, wealthy people such as Bill Gates and Warren Buffet give away billions of dollars to charity and they are still wealthy. Christians can use this portion to tithe while Muslims can use it as Zakat.
Ways in which One Can Invest
The final 10% is what one would call their play money. It is the money you can play with and take a risk with. The type of investment you undertake depends on the risk appetite one has. The more the risk, the more the expected return. However, risky investments also mean that one can also easily lose out on any return. Here are a few avenues one can invest their money:
Savings and Credit Cooperatives are a good way of saving money. One deposits money, which the SACCO invests and gives the members returns. SACCOs also give their members loans at lower interest rates than banks. SACCOs will invest in traditional investment vehicles such as bonds, stocks and property. The interest earned when they are giving out loans will also form part of the returns to members. The returns will vary with different SACCOs and will depend on the performance of the market or where the SACCO has invested. Over a long period of time, one can be guaranteed a return of at leastt 7% per annum. Finances: 10 Pros And Cons Of Joining A Sacco
2. Unit Trusts
Unit trusts are issued by insurance companies (such as Old Mutual) and investment banks (such as Dyer and Blair). These institutions will take your money and invest it on your behalf. Returns are modest as these institutions still have to pay the investment managers and meet overhead costs.
The returns also depend on the risk appetite one has. Those who are risk-averse will probably go with unit trusts invested in money markets (which invest in bills and deposits) or unit trusts invested in bonds. The aggressive investors can invest in unit trusts that invest mainly in stocks and offshore but the returns are bound to fluctuate depending on the performance of the stock exchange and more so, the composition of the stocks in the portfolio of the fund. There is also a balanced fund that comprises bonds and stocks to minimise risk (for those who are aggressive) and increase returns (for those who are conservative).
Investing in Treasury Bills is also another conservative way of investing. Treasury Bills are issued by the Government over a time of less than a year. The three types are 91-day, 182-day and 364-day. On these kinds of investments, the return is about 8% per year, and the good thing about it is that the return is guaranteed. However, the minimum amount one can invest is Kshs. 50,000.
Institutions sometimes issue commercial papers which work in the same way as T-Bills but have slightly higher coupon (interest) rates, but the minimum amount could be anything from Kshs. 100,000.
Governments and companies raise money by issuing bonds. Basically, they borrow money from the public and payback at a later time (maturity date). In the meantime, the issuer of the bond will pay the people who have loaned them the money some interest either annually or semi-annually. There are different types of bonds, from 2-year bonds (whose maturity date is two years after issue), 5-year, 10-year up to 30-year bonds.
From bonds, one can get around 12% per annum, and just like bills, the return is almost guaranteed. Generally, Corporate bonds give higher returns than Treasury bonds (bonds given by the Government) though the latter is less risky. The disadvantage is that the minimum amount needed to invest is normally at least Kshs. 50,000 for T-Bonds and Kshs. 100,000 for Corporate Bonds.
In the last budget reading, the Finance Cabinet Secretary mentioned that there were plans to reduce the minimum amount required to invest in T-Bills and T-Bond to something like Kshs. 3,000. This will enable more people to invest in bills and bonds. What are the advantages of buying government bonds through Mpesa – M-Akiba
Land is one of the assets that appreciate in value at a faster rate than the overall inflation rate. Over a three-year period, the returns will seem modest but over a decade, the returns will blow your mind. There are areas where land has appreciated more than five folds over the last decade.
Whether it is buying land and developing it, or keeping it for speculation purposes and later selling it or subdividing it into smaller portions to sell later (land banking), land will most often than not, give you a decent return.
The disadvantage is that due diligence is needed to ensure you are not conned and that one is buying at a prime area (or an area that can become prime). Moreover, land requires a lot of capital. If you plan to develop, then you will need even more money to develop. If you are buying for speculation purposes, then you have to keep it for about three years for you to make a good profit. Finances: 5 Things You Should Know Before You Buy Land
Stocks are traded at the Nairobi Securities Exchange. When companies want to raise capital, sometimes they will invite people to own part of the company by selling that part in form of stocks and listing at a stock exchange such as the NSE. Whenever the company makes profits, the shareholders will be paid dividends.
One can buy, using a stockbroker any number of shares as long as they are available and in multiples of 100.
Over a long time, stocks are one of the best investment vehicles if someone picks the right stock. Over the last decade, the share price of stocks such as Jubilee Insurance, Diamond Trust Bank and Kakuzi has grown more than fivefold, and this is not factoring in dividends received.
On average, stocks will give a good return per annum. However, picking a bad stock can be disastrous as anyone who bought Kenya Airways, Mumias Sugar or KenolKobil can attest. Finances: Tips On How To Invest In Stocks
There are other investment vehicles available such as putting money in a retirement benefits/pension scheme or investing in the soon to be formed derivative market. The investment vehicles all have pros and cons, and it is up to someone to gauge which vehicles are suitable for him based on their risk appetite. The recommendation is a diversified portfolio that includes several investment vehicles. Creating Wealth: 6 Simple Habits Of Successful Investors
One thing you can do is start with a financial plan – Planning For The Future & How To Create A Financial Plan and also take stock of what you already have so that you know your net worth – Personal Finance: How To Get yourself Organized
These articles will also be helpful – Finances And Investments: How To Plan For The Things We Cannot Plan For To Avoid Being Blindsided. Also, check out how to deal with black tax because black tax can really affect your ability to become wealthy – Dealing With ‘Black Tax’ Part 2: Building Generational Wealth To Break The Black Tax Cycle
If you are married you need to have money conversations with your partner – check out Couples And Money: How To Navigate The Minefield Of Marital Finances
If you are a parent start teaching your children financial literacy early so that your kids can manage their money and the wealth you leave them as an inheritance properly. Check out these helpful financial articles below.