- Start by paying yourself, and it typically should not be less than 10 per cent
- Plan for the essentials, the things you cannot live without
- Take advantage of the tax breaks that are offered by our Income Tax Act
There are things you are obliged to do as a member of a nuclear family. For example, since your parents educated you, you may be obliged to help educate your siblings, since some parents invest in educating one sibling so that that child can educate the rest.
There are other demands, which come from what I refer to as the universe – your cousins, aunts, uncles, and so on.
When it comes to family, you have to figure out how to factor in those needs into your budget without compromising on your finances.
It starts with an honest conversation on what you can and cannot do. It is alright not to reveal how much you earn.
Honesty should be about how much you can spare. Be careful about creating dependency. If parents need support, do it, while also discussing how you can enable them earn an income.
For the larger family, help when you can.
You cannot fix everyone’s problem. Have a bit of a spine to say, “I am not able to help now,” and being OK in your conscience knowing that.
However, for the immediate family, there is no escaping that.
Start by paying yourself, and it typically should not be less than 10 per cent. This is what is usually referred to as savings, which in turn go to investments.
The reason we call it paying yourself is that with everything else you spend on, you are paying other people.
Paying yourself goes to building for yourself investments that will work for you.
After paying yourself, plan for the essentials, the things you cannot live without. These are rent, school fees, food and transport to work.
When budgeting, do not just budget for monthly expenses. Budget also for annual expenses like insurance which comes once or twice a year and school fees which comes every three months.
You need to be setting aside a certain amount of money every month to cover this expense, so that it does not catch you by surprise.
Once you have paid yourself and set aside money for your essentials, then you get to a free space.
You can use that pool of money as spending cash for things like grooming and so forth, or you can divide it up further and decide the specific amount that goes to each item.
Know what tax breaks you are entitled to
Take advantage of the tax breaks that are offered by our Income Tax Act. For example, if you contribute to a registered pension scheme, that contribution is tax allowable at Sh20,000 per month.
Most employers have a voluntary pension scheme, where they tell you that for example if you contribute five per cent; they will match your contribution with five per cent.
Unfortunately, most young employees do not take advantage of this, because it is voluntary.
That’s just leaving money on the table because first, your employer is giving you free savings and secondly, the taxman is giving you free money when they tell you that the contribution will not be taxed.
There are other breaks like insurance relief, a mortgage relief and so on.
Manage your loan repayments
If you are servicing a loan, you can also manage it by putting any extra money you receive into paying back the loan.
This reduces the interest that you will pay on the loan and also cuts down on your monthly repayments.
So if you have a five-year loan, you don’t have to pay it over the five years. You can save substantially by doing this.
Differentiate between insurance and investment
There is a difference between insurance and an investment scheme. A lot of the products being sold in the market are investment schemes.
The one test to tell whether you are actually buying insurance is that insurance only pays you when the event happens.
For example, if it’s medical insurance, you only get the benefits if you get sick. Insurances that work that way are a lot cheaper than the so called investment products.
Investment products are good but they should be evaluated not as insurance but as an investment. Compare them against all your other investments as objectively as possible.
When the deal is too good, think twice. Many people do not value their capital enough, since they keep exposing it to avenues of loss.
Preserving your capital is the first law of growing wealth. A lot of people lose money because a certain investment promises to double your money, has an investment return of 20 per cent per month and so on.
However, before you invest, first figure out how the investment makes money and how it will generate that 20 per cent per month that they are promising to pay you back.
So for example, if someone tells you to buy bitcoin, but you do not understand bitcoin, either take time to understand it or stay away.
Whenever an investment relies on you to recruit people, stay away. Ensure that whoever you are entrusting your money with has a track record and you are protected by contract. Be cautious even as you go into business.
Go into it knowing that two out of three businesses fail. If you put all your precious savings into a side venture, you have to be careful not to lose it.
Break emergency meals into bite-sized pieces
Haba na haba hujaza kibaba. When people hear that they should have three months’ worth of your expenses saved up in an emergency fund, it looks big.
However, if you save a little every month without fail, after one or two years you will have quite a lot of money saved up.
Do not look at the whole amount, look at putting a little on the side every month. This is besides your monthly savings.
Do not bite off more than you can chew
Gauge your appetite for risk. Some people join saccos, save, then borrow to acquire assets. You can do this if you are borrowing to invest.
Just make sure that you can repay the loan, whether or not the investment pays off, because even if it does not, the sacco will not care – they will want their money back.
The most important thing to remember is that if you intend to build wealth on a salary, you will need patience.
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