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A Middle Class guide to wealth creation - Nairobi Business Review
Every shilling counts
Every shilling counts

In Summary

  • Save every cent you can. Invest every surplus shilling.
  • Financial literacy helps you firm up your understanding of wealth creation through prudent investments, hard core savings and portfolio diversification.
  • The golden rule of wealth management dictate that your lifestyle and spending habits should never exceed your income.

The fundamental pillars of wealth management are often well known but little understood. In our seminal article on Financial Literacy, we begin with the golden rules of wealth management and the straight and narrow path to wealth creation.

Here we will look at five foundation blocks that when applied will suck you out of mediocre finances to considerable wealth.

Balance Sheet Management.

In balance sheet management, your assets should always be greater than your liabilities. At no point in your life, should the value of your debts be greater than the underlying assets.

Avoid taking loans to fund lavish lifestyles such as the purchase of expensive electronics, travels and holidays. Cars are a money pit too, due to their depreciating nature. In 5 years, the car would have depreciated by more than half its value. Interest and principal repayments would be more than 1.5 times the original cost of the car. Bank wins, car owner loses – Big time. Here, we have not even factored in the total cost of car ownership; insurance, servicing and regular maintenance of worn parts. Mechanic wins, car owner loses – Big time.

Avoid mortgages too, especially if they are payable at market rates. A 10M loan, at an interest rate of 14% per annum, means that the total principal and interest repayments will be over KES 26 Million over a 20-year period. This means that you actually bought the house at more than twice its value. Bank wins, Homeowner loses – Big time.

Lifestyle

The golden rule of wealth management dictate that your lifestyle and spending habits should never exceed your income. Of the principals of wealth management, this is the most underappreciated and ignored.

The lifestyle of the rich and famous will not make you wealthy. More so, if you are bogged down by liabilities such as car and credit card loans. Living lavishly when you are young, has a great detrimental impact on you ambitions to become rich in future.

Road trips to Naivasha, binge drinking in Westlands, unnecessary shopping at Malls in Nairobi, are all detrimental to your wealth creation. ‘But life is short!’ you say. That mantra will be ironical when you are in your sixties and with no retirement income. You will look at the spending habits of your twenties and thirties with contempt and regret.

Save every cent you can. Invest every surplus shilling. You are not being cheap; you are being frugal. A frugal lifestyle is not a cheap lifestyle. Being frugal means you spend on what is necessary for you to life a happy and stress free life.

Financial Literacy

Financial literacy can be defined as soaking up in financial knowledge and applying this wisdom into everyday life. Appreciating and adhering to the fundamental aspects of finance is key in building a solid foundation for wealth creation.

Financial literacy helps you firm up your understanding of how to create wealth through prudent investments, hard core savings and portfolio diversification.

Portfolio diversification is the art of spreading your assets across many investment classes to reduce losses in case one class of asset performs poorly. For example, don’t invest all your money at the Nairobi Share Index (NSE), and while at it, ensure that all if it is not invested in a single stock.

If possible spread your assets in the following classes; Real Estate (shamba’s), Stock Markets (NSE), Government Securities (Bonds and T-Bills). If you feel sufficiently philanthropic in your diversification strategy, you can extend to more investments in foreign currencies, commodities (e.g. gold) and even bitcoins.

All this can only be attained through financial literacy.

Healthcare

In Kenya, many middle class employees are safely cushioned against wealth busting medical bills by their employer’s insurance covers.

However, many others, and their family members, do not have any form of medical insurance. Hence, a lot of money is lost on medical bills due to ailments. Too many times, lives have been lost due to lack of adequate healthcare plans for self, parents and close relatives. In the process of seeking treatment, wealth and savings have been obliterated leaving some in precarious financial positions.

If you can afford a car, you can definitely afford an insurance cover for you and your parents. This will save you tones of cash. If you cannot afford a car, there are dozens of affordable micro insurance covers in the market. Have you and your parents registered for NHIF?

Fitness

What does fitness have to do with wealth? An unhealthy lifestyle is detrimental to your wealth creation ambitions. Poor lifestyle choices will lead to greater visits to the hospital in future. This will take away time and energy that ought to have been spent on the life long process of creating wealth.

Being pragmatic means that we can do our best to avoid lifestyle disease. Avoid a sedentary lifestyle when you can; walk as much as possible, use the staircase instead of the elevator, run and jog with your friends.  A fit body leads to a finer mind leading to richer lifestyle and a happier future.

PS – Follow our website to learn more about these different classes of investments through our free financial literacy programs and articles.

 

 

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