The 7 key principles to building wealth

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May 10, 2023

Do you want to be rich?

Of course, you do!

Unfortunately, many of us do know the first thing about becoming rich, That is why I have compiled a list of seven key principles to building wealth. If you want to achieve financial independence, then you need to internalize and apply these key principles into your life.

Building wealth is a long-term process that requires discipline, patience, and the right mindset. Here are seven key principles to help you build wealth:

#1. Set Clear Goals

The first step to building wealth is defining clearly and concisely your own personal definition of wealth and what it means to do. This creates a clear picture of what your financial goals ought to be. It will help you identify what you want to achieve financially and create a plan to achieve those goals. This will enable you to have a clear picture of what your financial goals actually are.

A solid foundation for your goals will require you to:

Create a budget and stick to it. A budget will help you track your income and expenses, and make sure you are living well within your means.
Protect what’s important i.e. your family, health and assets. Purchase insurance and have your life covered to cushion your finances from unforeseen financial hurdles that life throws at you.
Invest for your future needs. Whatever long-term financial goals lay ahead, invest in them.
Consider your retirement. In order for your investments and savings last well past your active working years, adjust your investment strategy to consider your retirement. Not only should you have personal retirement investments, but incorporate life insurance and social security benefits as well.

#2. Spend Less Than You Earn

The importance of living below your means cannot be stressed enough. The less you spend, the more you can save and invest. By living below your means, you are less likely to find yourself in debt and/or increase your debt load beyond what you should rationally risk.

If start living below your means today, you’ll be well on your way to achieving financial freedom.

#3. Invest Early and Consistently

Many surveys and studies show that the earlier you invest, the richer you get. Investing is one of the best ways to build wealth over the long term. The earlier you start, the more time you have for your money to grow. While you are at it, be consistent. Compound interest is a powerful force and even small contributions made over a long period of time can result in significant returns.

Therefore, stay committed to your investment plan and avoid temptations to jump in and out of the market based on short-term fluctuations as we have experienced recently. Wherever you invest – stocks, real estate or other assets, make sure you are regularly putting money into the investment and taking advantage of the gains over time.

#4. Diversify Your Investments

Diversification is the key to managing risk in your investment portfolio and therefore, forms one of the key principles of building wealth. Diversifying helps reduce risk and increase the potential for higher returns. Consider investing in a variety of different asset classes, such as stocks, bonds and real estate to reduce the impact of market volatility on your overall returns. Even within each asset class, further diversity in a mix of large and small-cap stocks, domestic and international bonds, and different types of real estate investments.

#5. Minimize Taxes and Fees

Fees and taxes can eat away at your investment returns. So it’s important to minimise them wherever possible. Consider investing in low-cost investment options such as funds or ETFs and avoid high-fee mutual funds or actively managed investments. Also consider, investing in tax-efficient vehicles as as government bonds.

Always pay attention to trading fees, account maintenance fees, and other expenses that can add up over time.

#6. Exercise Patience And Stay Focused

As aforementioned, building wealth is a long-term process that requires discipline and focus. Avoid sideshows and distractions caused by short-term market fluctuations and hype.

Investing is a long-term game. Therefore, it is important to have a perspective that spans decades not just years. Also, avoid the hype and trends that arise every now and then. Also, avoid trying to time the market or make short-term trades based on news headlines or market rumours. Instead, focus on the fundamentals of the companies you are investing in and the long-term trends that driving the market.

#7. Continuously Educate Yourself

Be educated and consistently stay informed.

The investment landscape is constantly changing, and it is important to be educated about personal finance and informed about the latest trends and developments. Read books, articles, financial news and analysis, attend investment seminars and webinars, seek out advice from industry experts in the field and talk to other investors to stay up-to-date don’t the latest investment opportunities and strategies.

Being at the top of the information pyramid allows you to make better choices and have more realistic expectations. With informed decision-making, you have a better idea of risks and benefits related to the options available to you, which gives them a more realistic expectation of the decision outcome.

Final Thoughts

Building wealth through investing is not a quick or easy process, but by following these key principles, you can maximize your returns and achieve your financial goals. Start early, diversify your investments, minimize fees, have a long-term perspective, and stay informed. With patience, discipline, and a sound investment plan, you can build wealth and secure your financial future.

Image Credits: Top by Jessica Lewis Creative via Pexels

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8 Ways to Save Money On A Tight Budget

By

Irene Makanga

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March 16, 2023

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The cost of living seems to be spiralling upward and up each day, making it seem harder and harder to save any money. At this point, even small adjustments to your lifestyle can help. So, if you’re looking for ways to save money on a tight budget, you just have to put a little effort into it.

Saving money on a tight budget can be challenging, but there are many ways to make it work.

Here are eight (8) ways to save money on a tight budget:

1. Creatively Cut Your Budget

There is so much you can do with your budget to ensure that you save money on a tight budget.

First of all, do you have a budget?

Before you can save money, you need to know where your money is going. Create a budget to track your income and expense. This can be done using an app, spreadsheet or going old-school using pen and paper.

With your budget down, here are some simple ways to creatively cut your budget:

Prioritize your expenses: The most basic way to cut back your expenses is to itemize your expenses in your budget into two main groups – essential and non-essential expenses. After which, determine which ones to keep (essentials e.g. rent, food, transportation or fuel) and which ones you can cut back (non-essentials e.g. entertainment, dining out).
Reduce your bills: Now it’s time to get creative by looking for ways to reduce your existing bills. What more can you do to reduce your expense on essential bills? For instance, you can consider negotiating with your service providers to get a better rate, change subscriptions or switch to a cheaper provider.
Cut back on non-essential expenses: Review the items that still made it to your non-essential list and identify areas where you can cut back some more. For example, consider buying generic brands, doing your own hair and nails or cancelling subscriptions that you do not use often.
Find ways to increase your income: Sometimes cutting back your budget just won’t cut it and you need to look for ways to earn more money. Some ways people look to increase their income is by selling items they no longer need, taking a part-time job or freelancing.
Set savings goals: Be realistic and start small, then gradually increase savings as you get used to living on a tighter budget. Remember, saving is always easier when you have a plan.
Shop smart: Always look for deals and discounts when shopping. Buy items in bulk, use coupons and always compare prices to get the best deal possible.

2. Pay Yourself First

Trying to save when there is little left over is challenging. So, flip that around and do the saving first.

Set up a direct deposit from your income into a dedicated savings account and contribute to your retirement plan. Doing so will ensure you continue to prioritize your long-term financial well-being. After all, you won’t miss what you do not see.

3. Buy a Bidet

The price of toilet paper has almost doubled since the pandemic and it’s eating deeper and deeper into our budgets. Therefore, if you have not considered it already…now is the time to think about getting a bidet. A bidet will quickly pay for itself in toilet paper and wet wipe savings. They are efficient, so they won’t run up your water bill – if that is a concern to you. The low-end models do not use electricity.

Ultimately, if not for your finances, consider the environment – cutting back on your use of disposable products is always great for the environment.

4. Take On a No-Spend Challenge

You might think that forcing yourself to not spend any money for a day, a week or a month would just create a lot of pent-up demand.

For instance, you might think that if you don’t buy groceries now, won’t you just buy more later?

Maybe.

But you also might find yourself reevaluating those purchases you postponed, thereby resetting your budget.

For instance, I typically go on a no-spend week on the first week of every month. I typically pay all bills and purchase groceries the week before the month starts because, at the start of the month, that’s when stores I frequent post all these offers. I know myself and I know I can’t hold back. Since I am aware of this weakness, I am therefore able to structure my life and access to finances around it to avoid impulse buying of unnecessary items. My no-spend week challenge has kicked up my account balance a notch and slowly but surely, I will be able to kick this habit.

5. Stop Using Credit Cards

Use cash for your purchases instead of credit cards or debit cards. Paying with cash feels more painful than paying with credit or debit cards. The pain of payment that comes from using cash can curb impulse responses and thus reduce the chances of making impulse purchases. This can help you stay within your budget and avoid making unnecessary purchases and accumulating debt.

6. Search YouTube Before Paying a Professional

Some tasks and repairs around the house can easily be DIY – like tightening a leaking pipe etc. However avoid dangerous tasks, particularly those relating to electrical connections. Also, consider whether or not you might make the problem worse and more expensive to fix if you try to do the work yourself.

Overall, most minor tasks we typically might hire people to do are surprisingly cheap and easy to handle ourselves after we’ve watched someone else do them on youtube. From changing your car’s air filter to unclogging your own toilet. The next time you have a problem, you’d normally pay a professional to fix it…do some video research first. Youtube has become the school of life.

7. Reduce Your Subscriptions

Newspaper, Netflix, Internet, Cloud Storage, Google, Gym and more. Out of all your subscriptions, which one do you use most?

Allow yourself the indulgence, and cut the rest. Many have free alternatives. Also, you don’t have to pick one subscription and stick with it all year – try switching things up, for instance for Netflix this month, Spotify the next etc.

8. Give Yourself an Allowance

It can be quite miserable and difficult to stick to a strict budget. Give yourself an allowance. Every day, week or month or general pay period make a conscious decision about how much money you’ll allow yourself to spend on fun things – remember to remain within your overall budget though. This will prevent you from stretching your willpower too thin and risking long-term financial success with a spending splurge.

Then, enjoy those treats guilt-free. And if you want to save up for something bigger, roll over your allowance from one period to the next. A cash envelope or dedicated savings account can help you manage your fun money and keep it separate from your essential spending.

The Bottom Line

There are so many ways to save money on a tight budget. But, remember to succeed, saving money on a tight budget requires discipline and commitment.

Stick to your budget, prioritize your spending, and stay focused on your savings goals.

Image Credits: Top by Karolina Grabowska via Pexels.

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5 Financial Trends That Could Shape Your Finances in 2023

By

Irene Makanga

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January 16, 2023

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6 Financial Trends That Could Shape Your Finances in 2023

What are some of the biggest financial trends shaping our decisions in 2023?

The pandemic, the war and then an election year left the economy and our finances discombobulated. 2022 was supposed to be the year everything returned to normal. But, a week into 2023 it’s the same script. We are still hip-deep in uncertainty: high inflation, the ever-weakening shilling, our poor-performing bourse and a dark cloud that seems to be hovering, foreboding a recession-like situation.

“This year is meant to be easier, right?” – the optimist.

No one can predict the future of the Kenyan economy in 2023, but optimism is rife. Therefore, having a general idea of what is coming can help you prepare better. If you gird your finances for a little more turmoil at the outset of the year, the relative calm we expect to follow should be even sweeter.

Where preparation, meets opportunity.

Here are the financial trends that could share your finances in 2023:

1. Recession is coming – so analysts think.

We have been receiving warnings of a looming impending global recession this year if the war in Ukraine, the rising cost of living, inflation and other economic shocks persist.

How to handle it: Consider beefing up (or starting) your emergency fund. Having cash stashed away in case of job loss or rising expenses can provide peace of mind. Additionally, you may want to assess your debt, specifically debt with variable interest rates. In the event of economic turbulence, variable rate debt is akin to throwing an unpredictable wrench into your finances. Therefore, consider paying down high-interest and variable-rate debt to prepare for economic uncertainty.

2. Inflation and Interest Rates will ease – at some point.

Inflation is the dragon on the ropes driven by non-economic factors and therefore it’s fair to wonder if a purely economic response like raising interest rates will be enough to tame this dragon. I do not think so, but if inflation begins receding in 2023, it will give Banks a reason to lower interest rates for borrowers.

How to handle it: High-interest rates on savings accounts and term deposits, aren’t likely to last through the year. Therefore, it is worth looking into high-rate environment investment options.

3. Stock Market Volatility – Hii economy ni mbaya!

Our stock market is quite dependent on foreign investors. Therefore, when things slow down in international markets, it drags our market along with it. Heightened global risks from non-economic events such as the pandemic, the war in Ukraine and other economic shocks, have seen large capital outflows from our bourse. These exits by foreign investors have served to dive down stock valuations and lead the way in losses.

How to handle it: No matter how the market pivots, there’s little to be gained from panic selling. Most investors are in it for the long haul anyway. So, if you are a buy-and-hold type of investor, make sure you feel comfortable riding out the highs and lows of the market. You might see some of your investments lose money, but selling when the market is down will surely lock in your losses. Thus, diversify. That is the best position to position your portfolio to weather the volatility.

4. The Kenyan Housing Market is still growing and shifting to the tide.

This year buyers will likely be dealing with prohibitively high mortgage rates as lenders adjust their lending rates upwards in line with the revised Central Bank of Kenya (CBK) base lending rate. Therefore, mortgages are now costlier despite the higher demand.

On the other hand, renters in up-market estates will likely see a further decline in rent in major estates in Nairobi as a result of the harsh economic realities we are facing.

How to handle it: If you’re not in a position to buy a home now, your situation may improve next year. Take this time to shore up your finances. Consider paying down any outstanding debt you may have and shift your down payment savings into a high-interest savings account. When things improve, hit the ground running and accomplish that goal.

5. Crypto Will Remain on the Fringes of the Financial System

After the events of cryptocurrency’s self-disruption in 2022, crypto will remain a fringe asset in 2023. The losses that walloped Bitcoin and many other tokens only magnified the sector’s inherent unpredictability. What’s worse is the collapse of the multibillion-dollar cryptocurrency exchange, FTX in November, exposed corruption and mismanagement.

I doubt that the issues within the crypto industry will be resolved in 2023. Additionally, its adoption into mainstream finance will remain highly unlikely. However, opportunities exist to iron out the kinks and move the industry into a positive future – for even Rome was never built in one day.

How to handle it: As always, no matter what crypto asset (a coin or stock of a blockchain company) you invest in, always do your homework. No shortcuts. In these uncertain times, you need to nail this down, particularly, how to store, trade or retrieve your assets in the event of crypto armageddon.

6. Artificial Intelligence (AI) revolution in Personal Finance

The integration of AI and machine learning in finance is one of the biggest financial trends of 2023 and has taken the industry by storm. The upside for the industry is tremendous – from revolutionizing human-based customer service and financial advice to the utilization of deep learning algorithms in predictive analytics.

Due to AI’s ability to analyze vast amounts of data quickly and accurately, decision-making will be much easier. In the context of personal finance, we can collect and review our personal data, such as income, expenses, savings, investments and financial goals using AI. AI has the capacity to provide personalized advice, tailored to our own individual needs and circumstances.

Here are some AI-powered personal finance apps that you can check out – MintZip, Cleo.

By And Large…2023 will be a year like no other

All signs are pointing to a turbulent year. High inflation, political instability, and taxes…are some of the challenges we shall be facing this year. These financial trends of 2023, will continue to evolve and shape the decisions we make. Large companies will be adopting conservative strategies and employing consistent risk management, to keep heads above water.

Image credits: Top by Picas Joe via Pexels

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A Comprehensive Beginners Guide to Buying Land In Kenya

By

Irene Makanga

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December 27, 2022

0

Are you in the process of buying land in Kenya? Here is a comprehensive beginners guide to buying land in Kenya:

Step 1: Identify the Land

As a land buyer, you need to get your goals right. Consider the intended purpose of the land you plan to purchase. This will influence your decision in terms of purpose (residential or commercial), size and location. Once you’ve looked around and identified the land you can proceed to the next step, which is conducting a search.

Step 2: Conduct A Search At the Land Registry

To conduct a search, you’ll need to secure three things:

A copy of the title deed

A copy of the seller’s identity card, and

A copy of the KRA PIN of the seller

With these documents, proceed to the Land Registry – either at the Ministry of Lands or the local Land Registry where the land is located. At the Land Registry, get a search application form, fill it in and attached copies of the title deed, identification card and KRA PIN provided by the seller. The aim of this process is to confirm the real owner(s) of the land, the acreage of the land and any CAVEAT on the land. This search typically costs about Kshs 520.

Step 3: Outstanding Land Rates

After conducting the search on the title at the Ministry of Lands/Land Registry, ensure there are no unpaid rates attached to the Land. This verification can be done by conducting a search with the County Government’s Office where the Land is located.

The search has a fee attached and it varies from county to county.

Please note that for the title to be transferred, all land rates need to be paid up. Therefore, it is crucial to discuss with the seller who will settle the land rates, in case there are any unpaid Land rates.

Step 4: Aquire the Land Map

Once everything is in order, you may now proceed to the Ministry of Lands/Land Registry to acquire at least two land maps for the land you intend to buy. One map, drawn to scale, shows the exact measurements of the land or mutation. The other map provides an overview of land along its adjacent plots. Each of these maps will cost you about Kshs 300 to Kshs 350.

Step 5: Conduct Land Verification

After getting the maps, along with your surveyor and seller go to the actual location of the land to authenticate everything on the map.

This is a crucial step that shouldn’t be overlooked to avoid any problems in the future. Verify the land and erect beacons to prevent any future misunderstandings or disputes.

Step 6: The Sale Agreement

After all the above steps have been concluded successfully, a sale agreement is needed to proceed.

In the presence of a lawyer, the buyer and the seller need to agree on certain things that need to be incorporated into the sale agreement. You’ll need to agree on the price of the Land and the method of payment for the Land. This agreement will protect you legally if either party fails to honour the agreement.

The price of the sale agreement varies with the value of the land and the location – so says the lawyer. However, please note that according to LSK, if the value of the land is below Kshs 1 Million, you’ll pay your Lawyer Ksh 3,000. For anything above Kshs 1 Million, you’ll need to pay your lawyer Kshs 8,000.

Step 7: Land Control Board Clearance

As a land buyer, it is imperative to gain clearance from the Land Control Board. The Land Control Board, meet once monthly. The board comprises the county commissioners and the elders of the area where your land is located. The purpose of the clearance is to ensure that the land transaction and transfer is transparent. Additionally, verify there was no illegality involved during the entire process while buying land in Kenya that could nullify the outcome. It will cost Kshs 1,000 for a regular board meeting for oversight. And on special instances, in the case of urgency, Kshs 5,000 is payable for special board meetings. The outcome of the meeting is to issue consent for the land to be sold if the transaction is up to par.

Step 8: Land Valuation

Land valuation is the next step. At the Land Registry, you’ll need to fill out a valuation form to apply for Land Valuation. The lands office will compute the stamp duty to be paid. Stamp duty is often based on the value of the land and its location.

In the sale agreement, it should be stated clearly who between the seller and the buyer should pay for the stamp duty to avoid any form of confusion.

Step 9: Transfer of Title/Land Ownership

After paying the required fee on stamp duty based on Land Valuation, you’ll need to apply for the transfer of the Land. This is done through the Land Registry. Both the buyer and seller, are required to sign the required transfer forms. After which, proceed to submit the said forms to the Lands Registry.

The seller needs to provide the following documents for the transfer to be done:

The Land Control Board Consent Form
KRA PIN
Two (2) Passport size photos
The old Title Deed
Sale agreement

The change of ownership normally takes about three weeks. It will cost you anything between 1,000 to 5,000 Kenya shillings which vary in different counties.

Step 10: Receipt of Title

As the new proud owner, you will receive the new title deed of the land. The title shows that ownership has been transferred and the old title deed has been destroyed. As the new owner, you will then proceed to pay the required stamp duty. Stamp duty is often based on the value of the land and its location. If the land is in the municipality you pay 4 percent of the sale value. However, if it’s in the locality you pay 2 per cent of the sale value.

When all is said and done, do a search at the Ministry of Lands/Land Registry. This way, you can confirm that indeed the land has been transferred to you.

After confirmation, you can now invite your friends over for mbuzi to celebrate.

There you have it. The comprehensive beginners’ guide to buying land in Kenya today.

Image credits: Top by Helena Lopes via Pexels.

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6 Levels of Climbing the Wealth Ladder

By

Irene Makanga

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December 12, 2022

0

The best way to climb the wealth ladder is to spend money according to your level.

However, the path to wealth isn’t a meandering linear path but rather steps, with broad and narrow rungs. As such, we do not build wealth by merely slowly stacking money as we need to consistently account for the declining utility of every next shilling.

Thus, the question is:

How big of a step do you need to take?

How much more do you need to accumulate to experience a fundamental improvement in your life?

Is it more like a leap whereby we have to multiply our net worth by 10 for each upgrade in lifestyle?

In my experience, a reasonable approach would be to adopt a scale of measure, with a 3x multiple in each step.

Let me elaborate. Here is a breakdown of six steps or levels of the Wealth Ladder.

Step 1: Financial Foothold

How much do you need to get your first financial foothold? One million, ten million Kenyan Shillings?

The first, matters and it’s good to get it down and out of the way as soon as possible on your financial journey. As this is where you lay the basic financial foundations of wealth and build important habits like saving a significant portion of your income.

The simplest possible path to achieving your “Your First” is through income and high savings rates.

	Your First “Million”	Your First “10 Million”
Years	Ksh 1,000,000	Ksh 10,000,000
2 Years	Save Kshs 500,000 a Year	Save Kshs 5 Million a Year
5 Years	Save Kshs 200,000 a Year	Save Kshs 2 Million a Year
10 Years	Save Kshs 100,000 a Year	Save Kshs 1 Million a Year

Saving the first million or 10 is an important milestone and gets you a strong foothold at the start of the wealth ladder.

Step 2: Financial Security

What is financial security to you?

Is it having a level of wealth allow you to cover your basic needs?

What does this look like?

Is it having enough for the bulk of your mortgage, expenses and utilities?

Use the simple 4% drawdown rule for retirement withdrawals to estimate how much you might need to achieve financial security. The possible path to financial security (besides income and savings rate) is investment return, which plays a key role here.

Consider, the following estimate:

Let’s assume that your basic needs in life can be taken care of with either 10,000 a month or 100,000 a month.

Investment Milestone	Yearly Drawdown	Monthly Drawdown
Kshs 3,000,000	Kshs 120,000	Kshs 10,000
Kshs 30,000,000	Kshs 1,200,000	Kshs 100,000

Investment options and returns to hit that investment milestone:

Years to accumulate	Kshs 3,000,000	Kshs 30,000,000
1. 5-Year Investment	Ksh 500,000 a year at 12% p.a	Ksh 5,000,000 a year at 12% p.a
2. 10-Year Investment	Ksh 200,000 a year at 8% p.a	Ksh 2,000,000 a year at 8% p.a
3. 20-Year Investment	Ksh 100,000 a year at 5% p.a	Ksh 1,000,000 a year at 5% p.a

Building up your first Kshs 3 million or Kshs 30 million becomes a critical milestone and provides a secure safety net to reach higher up the wealth ladder.

Step 3: Financial Mobility

Financial mobility is essentially how your economic well-being changes over time and our goal is upward mobility. Using the 4% drawdown rule again, let’s move a notch higher by tripling the drawdown amount.

Let’s assume that with a Kshs 30,000 a month or Kshs 300,000 a month drawdown would grant you plenty of options and flexibility in your life. Whether it is downshifting your career, an extended sabbatical or travelling overseas for a few years, what is your number?

The possible paths for financial mobility, heavily depend on income and investment returns. Consider the following:

Investment Milestone	Yearly Drawdown	Monthly Drawdown
Kshs 9,000,000	Kshs 360,000	Kshs 30,000
Kshs 90,000,000	Kshs 3,600,000	Kshs 300,000

Investment options and returns to hit that investment milestone:

Years to accumulate	Kshs 9,000,000	Kshs 90,000,000
1. 10-Year Investment	Ksh 500,000 a year at 12% p.a	Ksh 5,000,000 a year at 12% p.a
2. 15-Year Investment	Ksh 300,000 a year at 8% p.a	Ksh 3,000,000 a year at 8% p.a
3. 25-Year Investment	Ksh 200,000 a year at 5% p.a	Ksh 2,000,000 a year at 5% p.a

Accumulating your first Kshs 9 million or 90 million is a momentous milestone.

Step 4: Financial Independence

What is your financial independence number?

On the same stance, let’s consider the 4% drawdown rule yet again. The figures may seem excessive for financial independence but let’s consider it all the same.

Let’s assume that with a Kshs 90,000 a month or Kshs 900,000 a month drawdown. This is more than enough for an individual and might even be enough to cover an entire household’s monthly expenses.

At this level, it’s all about optimizing your income, savings rate and investment returns. Consider the following:

Investment Milestone	Yearly Drawdown	Monthly Drawdown
Kshs 27,000,000	Kshs 1,080,000	Kshs 90,000
Kshs 270,000,000	Kshs 10,800,000	Kshs 900,000

Investment options and returns to hit that investment milestone:

Years to accumulate	Kshs 27,000,000	Kshs 270,000,000
1. 15-Year Investment	Ksh 700,000 a year at 12% p.a	Ksh 7,000,000 a year at 12% p.a
2. 20-Year Investment	Ksh 500,000 a year at 8% p.a	Ksh 5,000,000 a year at 8% p.a
3. 30-Year Investment	Ksh 400,000 a year at 5% p.a	Ksh 4,000,000 a year at 5% p.a

Racking up Kshs 27 million or Ksh 270 million in your lifetime is a remarkable achievement. That is financial independence and one might not need to earn a single shilling after that.

Step 5: Financial Freedom

Many of us might not get here or even come close to achieving financial freedom in our lifetime. At this stage, you’ll need to be an elite earning big and seriously optimizing with stellar investment returns.

What numbers would you be looking at here to regard yourself as financially free?

Consider these three paths:

35 Years – Invest Kshs 3,500,000 a year at a 10% p.a. return, yielding over Kshs 1 billion.
25 Years – Invest Kshs 6,000,000 a year at 12% p.a. return, yielding over Kshs 1 billion.
15 Years – Invest Kshs 8,000,000 a year at 24% p.a. return, yielding over Kshs 1 billion.

Step 6: Financial Power

This is the unicorn territory. The UHNW (Ultra High Net Worth). At this level, one could also start yielding substantial influence and power in society. Price doesn’t matter anymore unless we are talking about status symbol items like yachts or “reasonably-sized houses”. The level of financial power is beyond paygrade, and realistically speaking revered only for super-successful entrepreneurs with legendary investment returns.

The following numbers are totally out there, perhaps in the stratosphere. It is quite difficult for the man on the street to achieve this.

35 Years – Invest Kshs 5,000,000 a year at 12% p.a. return, yielding over Ksh 100 billion
25 Years – Invest Kshs 8,000,000 a year at 18% p.a. return, yielding over Ksh 100 billion
15 Years – Invest Kshs 10,000,000 a year at 35% p.a. return, yielding over Ksh 100 billion

With financial power, thoughts of legacy-building might start to dominate or you might start exploring options like reverse ageing or going to Mars.

Conclusion

Climbing the wealth ladder at a 3x increase in your net worth allows you to take great strides up the wealth ladder. This step will result in the ability to improve your standards of living for you and your family tremendously. As such, always try to aim one rung higher than what you think is realistically possible. It will push you to achieve remarkable things in the long run.

Good luck climbing!

Image credits: Top by Mikhail Nilov via Pexels.

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5 Steps To Developing A Winning Financial Plan

By

Irene Makanga

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December 5, 2022

0

We spend our lives planning; our next holiday, for a family, buying a yacht! Being able to realize our plans requires objectives, information, organization and compromise. Successful plans will also require a significant degree of financial planning. A comprehensive plan that covers savings, investments, insurance, retirement planning, education and emergency fund, major purchase planning and other financial goals.

Here are five steps to the financial planning process that will significantly help you increase the potential of developing a winning financial plan:

Step 1 – Defining your financial objectives and goals

Financial planning is built around financial objectives and goals that you want to achieve. Your goals and objectives serve as a guide to the financial plan as a roadmap for your financial future. Though goals may change over time, it is important to establish some preliminary goals to help guide your savings strategy.

For instance, what do you want your financial future to look like? What do you want to accomplish in the short-term – such as savings to purchase a car or buy a home? What goals seem easier to achieve, and which ones seem like a stretch?

As such your financial objectives and goals should contain the following features:

Quantifiable and achievable
Clear and have a defined timeframe
Separate your needs from your wants

The financial objectives and goals you come up with at this stage should be documented and used to measure progress. Periodic reviews will allow you to capture changing circumstances and ensure they remain relevant.

Step 2 – Gathering your financial and personal information

Once you have your financial objectives and goals in place, you’ll need to access your personal financial standing. As such, you will need to gather information with regard to your current income, budget, spending, savings, and investing habits. If you haven’t set a budget, now is the perfect time to start tracking your spending by category and increasing your own awareness of your spending habits.

The financial planning process and its success will heavily depend on the quality and clarity of the information you gather. With this information, you’ll be able to capture all the related information and account for your current financial stability. This includes income, expenditure, assets, liabilities, risk attitude, tolerance and capacity.

Step 3 – Analysing your financial and personal information

Once your objectives and goals are in place, you need to assess your ability to reach them based on your current cash flow. To reach your financial goals, especially long-term goals like building retirement income, you need to focus on meeting your monthly savings and investment goals. As such, you need you to assess your savings, liquidity, solvency and debt. Here are some ratios that you can use to improve your understanding of your financial circumstances and pinpoint areas of strength and weakness:

Savings Ratio – computed by dividing your cash surplus by your after-tax income. This ratio indicates your savings rate i.e. the portion of your after-tax income that is being saved. It can also be used to measure your risk profile. With this ratio, the higher the better but 10% savings is fair too.
Solvency Ratio – computed by dividing your net worth by your total assets, indicating your financial cushion in meeting your debt obligations. A high ratio is good and 50% or more indicates good standing and quality assets.
Liquidity Ratio – computed by dividing your cash equivalents by your monthly expense. The ratio seeks to measure your ability to meet unexpended expenses such as medical expenses. A good measure is subjective but having about 6 months in savings is great.
Debt Service Ratio – computing by dividing your monthly loan payment by monthly take-home income. Seeks to measure your ability to repay your debts promptly. Ideally maintaining your ratio within the following bands would be an idea for your financial stability – 40-45% housing loan, 20-25% personal or car loan, and 10-15% credit card debt.

This is the most difficult of the financial planning process, so do not shy away from seeking help. A financial advisor can easily asses your personal financial circumstance using the information you gathered in step 2. With it, they can assess your attitude, tolerance and capacity for risk using a psychometrically designed risk tolerance questionnaire in relation to investment assets. With this information, your advisor can assess your ideal asset allocation for investment and pension goals.

Step 4 – Development and presentation of the financial plan

Once you’ve assessed your current income, spending, and savings, you may need to draft up a financial plan based on this information. Using the information you gathered in step 2 and the analysis completed in step 3, link them to the goals and objectives in step 1 by addressing each objective or goal and making recommendations for each.

This will include the following as well:

Net worth statement (a balance sheet)
Annual consolidated tax calculation
Annual cash flow report addressing any shortfalls or surpluses you may have. For instance, if you are facing a shortfall, will you scale back your monthly spending or start a side hustle to help you reach those long-term goals.?
Timelines for when you will reach certain goals. For instance, savings for a down payment on your house.

Ensure that your financial plan remains flexible and can be adapted to new challenges and scenarios that may arise. As you move forward in pursuing your financial goals, continuously tweak and assess if you are well-positioned to withstand unexpected financial challenges.

Step 5 – Implement and review your financial plan

Once the analysis and development of the plan is complete, start implementing the courses of action that will help you reach your goals. This may involve:

A new investment strategy or pension
Changing your debt provider, perhaps from your local bank to opening an account with a Sacco
Getting life insurance or adding on some more additional life or serious illness insurance
Income and expenditure adjustments to ensure your goals are met within your stipulated timelines

Financial planning is a dynamic process that never ends as it requires continuous review and monitoring. Always take the time to review what you’ve done, and where you are regularly and check if you are on track with your goals. Goals should be reviewed annually to take into account a change in income, asset values, and business or family circumstances.

Conclusion

Should you choose to develop a financial plan to follow through in this coming new year, I hope these steps will help you get started. Financial planning that follows a properly defined and documented process will give the greatest chance of a successful outcome. It may not guarantee financial security or wealth, but it will provide an opportunity to pursue both and requires proper analysis, discipline and financial literacy on your part.

Image credits: Top by RODNAE Productions via Pexels

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Recession-Proof Your Life: How to Thrive During Difficult Times

By

Irene Makanga

-

November 28, 2022

0

Recession-Proof Your Life How to Thrive During Difficult Times

Recession-proof refers to entities or individuals that do not decline in value during a recession, ergo weather economic downturn better than everyone else.

More and more people are now worried about what their financial situation will look like a year – or even a few months – from now. There is so much concern about the economy going around and it’s reasonable to be worried about a potential recession.

How Does A Recession Impact You?

A recession is an extreme economic slowdown which may lead to job loss or issues with employment. This means that you could completely lose your income, or have financial incentives taken away at work – that is bonuses, reduced compensation, and more). During times of extreme economic slowdown, companies have to adjust to a decrease in consumer spending, that is fewer sales.

Therefore, you need to start preparing now so that you’re in the best position with your money to withstand the downturn. Whether for business or personal finances, things will get more challenging and money might be harder to come by. As such, there will be less cash to fund your day-to-day. Surviving this downturn requires deft financial management, or else you’ll crash and have a hard time recovering when the economy comes around.

How Do You Survive A Recession?

In order to survive a recession, I believe there is only one rule – Don’t run out of money. Structuring your personal finances, in such a way that enables you to remain liquid or have access to cash during an economic downturn is the best way to recession-proof your life and secure your future.

Let’s break this down.

1. Prepare For Lower Income or No Income

Periods of economic downturns do not tend to last forever and therefore are weatherable. You might lose your job or earn less for a period. You might have lower revenues coming into your business. Therefore, it’s important to consider all these possibilities and recession-proof your field.

Here are a few things you should start doing:

A. Build a 12 -24 month emergency fund

In a stable economy, it is recommended to have funds stashed for six months, however, times are different. You must have a sizeable amount worth 12 to 24 months of money stashed away for a rainy day. Use this time to build your fund just in case you need it. An emergency fund is one of the main tools in your financial toolbox and it’s mandatory to have one.

B. Minimize high-interest debt

In order to secure your future, try to reduce the amount of debt you hold. The more obligation you have, the more cash you need to make your interest and principal payment. When a recession hits and less money comes in, it puts you at risk of defaulting. In order to survive you will be forced to make deep cuts which hamper your financial goals. Debt limits your options and forces your hand, leaving you very little room to act opportunistically.

C. Prepare to borrow money

People tend to borrow more to get through difficult times – and that’s okay. But then interest rates are high, lenders will take a hard look at your capacity to repay. This will make it more difficult for you, if not more expensive for you to borrow. Therefore, make payments on time, keep balances low and try to pay down your high-interest debts now. These are the most important factors that will increase your chances later on.

2. Look for Ways to Cut Costs

When the going gets tough, the tough get going. While there’s nothing glamourous about going through financial struggles, there are still creative ways you can employ to save money to prepare yourself financially.

Here are a few things you can consider:

A. Delay major purchases

Consider putting off getting a new car or purchasing that double-door fridge for instance. You’ll need all the cash you have to weather things out.

B. Buy in bulk if you can afford to

Anything that is a cost-saving today that you’ll need and use in the future will save you even more money later, especially now that inflation continues to plague us. Consider stocking up on non-perishable staples like toilet paper, toothpaste or even soap which make a great bulk purchase.

C. Buy from switching brands or buying generic brands

There are numerous items that can be purchased at a lower cost and generally offer virtually the same utility as cooking oil, toilet paper, drinking water and more.

D. Cut Out Some Fixed Cost

You might want to consider getting rid of some fixed costs that may not completely be a priority for you. For instance, a streaming service or any other subscription service that you might rarely use.

3. Try to diversify your income

The riskiest thing you can do during a recession is to rely on one source of income. If your business or job isn’t in a recession-proof industry, consider getting a side hustle or look into diversifying your income so that you have few sources to rely on.

Here are a few things you might want to consider to create additional sources of income:

Side Hustles through gig apps like Uber and other car-hailing services, Upwork and other freelancing marketplaces, Airbnb or have your own independent service renting out your property (or vacant room in your home) etc.
Vehicle leasing to car leasing companies is another way to make a predictable stream of income.

4. Don’t panic with your investments

While many investors may choose to liquidate their investments to have cash, think twice before selling off your investments. The aim of the aforementioned things you need to get done is to that you do not have to make this decision in order to survive.

Additionally, even though you see your portfolio going down in value day by the day, it’s going to be tempting to sell everything to liquidate. The problem with this is that you’re likely selling at a loss and recessions are short-lived. Does it make sense to get rid of your investments due to fear or temporary uncertainty? If you believed in the investments you made in the beginning, you do not want to make rash decisions that might cause you a serious financial setback.

Therefore do not buy into the fear that is being peddled. During times of uncertainty, there is a lot of volatility in the market and any news leads to immediate reactions which you shouldn’t partake of. Therefore, if you really do not need the money to cater for your short-term expenses, do not panic. If you do, you will lose out on astronomical gains when the market turns around.

Should you still invest during a Recession?

A recession is a normal part of the economic cycle, and therefore it’s not a valid excuse for not investing your money. There are industries that are recession-proof, namely those in consumer staples, utilities and health care for instance and they are the ones you should be buying. Not all industries are badly affected by the economic downturn. In fact, there are those that thrive during tough economic times.

If you are afraid, consider investing in well-established, well-known businesses in the aforementioned industries. Make smart, unemotional decisions and consider protecting your gains while reducing losses with your investment portfolio. That is the only way you will survive and come out winning when the economy turns around.

Conclusion: Don’t panic — recessions don’t last forever

I believe that a recession is coming and things will be mighty tough. The good news is that things will get better. Therefore, let’s not panic and be recession-proof. Let’s do whatever we can to prepare our finances for more dire straits ahead. If perchance, we avoid a recession, your financial position will be better off and ready for your thoughtful considerations for the next decade or more.

A recession-proof financial situation will enable you to thrive and keep ahead curve during economic expansion.

Image Credits: Top by Leeloo Thefirst via Pexels

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Is Your Home An Asset or Liability?

By

Irene Makanga

-

November 20, 2022

0

I have heard a lot of arguments on this subject matter – To buy or not to buy? To mortgage or not to take a mortgage? And so on and so forth.

There are two main perspectives to this argument, owning a home is an asset versus owning a home is a liability. These arguments differ because of the school of thought they are based on. Those who think that owning a home is an asset, subscribe to the accounting school of thought and those who think that owning a home is a liability, subscribe to the school of thought of investors. Before we move forward, here is a little disclaimer – This article is not intended to discourage people from buying houses — but to make them aware of the consequences.

So, let’s delve deeper into these arguments.

The Accounting Perspective

In accounting terms, a house is an asset and a mortgage is a liability. The common understanding here is that an asset is anything you own ergo appears on the asset side of your personal balance sheet. Inadvertently making a house something owned and thus has value. The accountant believes that owning your own house, builds equity as opposed to when you rent, you build someone else’s equity i.e. by renting you’re making someone else rich; by owning, you enrich yourself.

Ultimately, accountants consider their homes as assets when:

⊕ The value of your current home is higher than the next home you intend to get.

⊕ You’re getting a smaller home, in the case of retirement for instance.

Ownership Equity

Let’s take a look at an example.

Assume that John owns a house worth KES 10M with an outstanding mortgage of KES 8M, then your equity on your home is KES 2M, and of course your liability at KES 8M plus all house maintenance costs, rates and mortgages. Here is how this reflects on his balance sheet:

John’s Balance Sheet
Asset	KES (‘000)	Liability	KES (‘000)
Home	10,000	Mortgage	8,000
		Total Liability	8,000

		Equity (Net Worth)
		Home Equity	2,000
		Total Equity	2,000

Total Asset	10,000	Total Liability & Equity	10,000

With the above, John would consider this home an asset if he owns it 100%. He would include it in the balance sheet as equity and expense all costs that go to house maintenance. On sale, he would gain KES 10M in cash and still expense housing expenses because he still needs to find a house to live in. Therefore, either way, to him there is no ability to increase or decrease the ability to convert this asset into an income stream that can actually allow him to buy anything else other than a replacement home.

Arguments to Own

Here, we would be looking at it as a glorified risk investment strategy that could potentially save you money or provide you with a place to live upon retirement. With that said, it would be categorized as an asset in the balance sheet because It’ll be seen as more than just an initial investment and capital costs put into it.

So, for those looking to own, your home is an asset because houses are not debts; mortgages are and owning a home invariably saves you rental money and ultimately you cannot place a marginal return on peace of mind. All in all, you still need a house to live in and owning a home removes the need to pay rent which is a recurring expense with no endpoint. The accountant’s perspective makes some sense – it may not present a short-term opportunity that many investors want, but it does make some financial sense.

The Investors Perspective

In investment terms, a home is a liability as investors look at assets as things that can generate a return on investment. Thus, if you are living in your home, as opposed to renting it out, it’s not generating any returns. In fact, investors would consider the house a money pit – maintenance costs, rates, taxes etc. This thinking, of course, differs from the true accounting definition, highlighted above.

Cash-flow

Using the cash flow perspective of an investor:

Assume Jane, an investor, owns a house. She has two options on how she can utilize it: rent it out or use it as her primary residence. Here is how this reflects her cashflow statement would look like:

House as an asset, used as a rental property

House as a liability, used as a primary residence

Cash Inflow

Cash Outflow

Cash Inflow

Cash Outflow

Rent

Insurance

Rates & other taxes applicable

Maintenance costs

No cash inflow

Insurance

Rates & other taxes applicable

Maintenance costs

Arguments to Rent

Investors look at cash flow, where anything that increases cash balance is an asset and anything that decreases it, is a liability. Therefore, the home is a liability as even when the mortgage is all paid up, you’ll still incur expenses such as maintenance, insurance and rates.

Investors are very conscious of any risks associated with their investments. They understand that owning a house and having it as a primary residence, increases risk exposure. Chief of them being inflationary risk and valuation risk, which are solely born by the investor. There is a common misconception that property values are always on the rise. But remember, even with increasing property values, benefits are only realized upon sale. Unrealized gains don’t count until they are realized, as they only remain real on paper (accountants’ perspective). This, however, does not mean that real estate is a bad investment – it just means that as a buyer, reexamine your reasons for buying before making such a huge financial commitment.

Tied Together – Example – Jane & John

Here’s an example that helps put both points of view into perspective:

Jane (who considers it a liability) thinks that because a home doesn’t earn any money, would rather rent. Thus, Jane lives in a rental home. John (who considers it an asset) understands that a home has value, even though it’s not a source of income. Therefore, John buys a home with a 15-year mortgage.

Flash forward 15 years. Jane is still paying rent, while John doesn’t pay any rent – now owns a KES 10M home. If John now chooses to move into another home of equal or lesser value, he can sell the first home and pay cash for the second house. Thus, John will never pay rent again – if he chooses. One day, Jane learns that the landlord can no longer afford to pay the mortgage and is now forced to sell the home. Jane must now move because of another person’s financial problems.

However, throughout the 10 years, Jane also bought a house on mortgage, rented it out and completed making the payments. Upon completion, she took out another mortgage, which she is still paying. Jane’s goal all along is to buy houses and rent them out for more than the liability – watching the current ratio to make sure that it isn’t slipping into its return on investment. As for Jane being at the mercy of her landlord, remember she isn’t domiciled and therefore can go anywhere and live anywhere, having a great income streaming in every month and some debt. Not too shabby, right?

Who Would You Rather Be – Jane or John?

At the end of it all, it all boils down to your values and goals. Asset or liability – sometimes it just doesn’t matter. What matters is…what do you want? If you do not want to be at the mercy of others, then buy the home. If you would rather rent cheap and own rentals, then do so by all means. It’s all about your own values and goals. But, most importantly, do not give a flimsy reason – never put off taking a financial action that would potentially move you closer to realizing your dreams.

The Verdict

Don’t listen to the hullabaloo out there. Draw your own conclusions.

However, I bet you are wondering, which way do I way?

Primary I am an investor, with an accounting school of thought inculcated in me. However, common sense dictates that cash is everything and money in, is better than cash on paper. Therefore, to me, a house is a liability – bite me if you disagree. Talking about this makes me glittery as there are too many variables to consider. Keep in mind that an asset is anything that places money into your pocket and a liability is anything that takes money out of your pocket. Thus, a home is a liability even if you pay it off – if you don’t pay taxes, keep it up and pay utilities, you’ll get a lien on your asset and this will make it an even bigger liability.

The world’s 1%, who own all the wealth understand this concept all too well – it is either money in or out. What we need is to look at our lives as businesses rather than looking at them as employees of our own destinies.

Image credits: Top, by Terje Sollie via Pexels

Meanwhile, You can click on the following links to read more about building wealth:

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Pay Off Mortgage Early Or Invest: Which is Best?

By

Irene Makanga

-

November 14, 2022

0

Pay Off Mortgage Early Or Invest - Which is Best

Should I pay off my mortgage early or invest?

This is a question you will inevitably confront in pursuit of your own financial security. The problem is the answer is far more complex and confusing. Your first intuitive response is to get out of debt as soon as possible. In our minds, the concept of making monthly payments for an extended period of time is antithetical to freedom.

However, there are times when intuition and finance disagree.

There are times when the decision to pay off a mortgage early isn’t just about getting out of debt. You’ll need to weigh more. Weigh interest yet to be paid against return on investment, time-value of money, and inflation. There are times when debt is the cheapest solution and every shilling tomorrow might be preferable to debt freedom today.

Therefore, when deciding whether or not to pay off your mortgage early or invest, the objective is balance. To balance your own intuition with financially sound and smart decisions. Remember that the best answer is and will always be one that is custom-fitted to your own personal financial situation.

Should I Pay Off My Mortgage or Invest?

The first step is to weigh your options. Figure out if there is anything more important than paying off your mortgage.

Have you built your personal financial foundation?

I am a firm advocate of getting your financial foundation in place before pursuing more advanced financial strategies. Your wealth can only grow as high as your financial foundation can support like how a skyscraper’s height is limited by the depth and strength of its foundation.

If you’ve got a sound financial foundation, then the answer to the “pay off your mortgage or invest” question becomes quite simple. Whatever gives you the highest after-tax return on your money is the right investment decision.

Before making such a decision though, consider the following:

Variable Investment Returns

Investment returns are highly variable. That even sometimes poor mortgage interest rates represent a superior return over a traditional investment portfolio.

But, mortgage interest saved becomes a bird in hand, in regards to the potential investment gains. Therefore, it becomes hard to find a 20-30 year period, where an investment portfolio would not provide higher than recent mortgage interest rates.

No Guaranteed Return

The problem with making any investment return comparison is the lack of guarantees. As such, you will be stuck at the start with a decision between a guaranteed, likely lower return for repaying your mortgage and an unknowable but potentially higher return for investment.

Therefore, the certainty of mortgage payoff versus the uncertainty of investment takes centre stage in your decision. Financial science may provide a clear answer. That is, investing historically has been known to provide a higher return in the long term. However, this is a decision you’ll have to live with for a long time. So, consider your risk tolerance, and confidence in the future you shape with the decision you make.

Random Human Nature

We as humans aren’t built like computers to implement brilliant ideas with mathematical precision execution. We deal with so many complexities that usually tend to throw us off course. That is life’s obstacles and our own human nature.

As such, here are three things to consider:

If you invest instead of paying off your mortgage, would you be willing to refinance the equity out of your mortgage, thus increasing your debt, to add to your investment account? And, if your answer is an emphatic NO, then you are logically inconsistent with your decision.
If you are someone who makes minimum mortgage payments and optionally, invests the difference, then how likely will you succeed with no discipline? It is said that the road to financial mediocrity is paved with the best intentions. In other words, an optional savings program that requires self-discipline is no savings program at all. Mortgages create enforced discipline – one that happens with certainty regardless of life’s wrinkles.
Life is good at one thing – dishing out lemons when you least expect it. Nobody expects to lose their job, have medical problems, become disabled or invest in fraud; yet, over the course of a 30-year mortgage, the odds that you’ll experience one or more of these admittedly rare and unfortunate events are far greater than you would like to believe. Thus, when your home is paid off, it becomes easier to weather these storms. Always plan for the unexpected because eventually, it will happen.

Learn More: Easy Real Estate Math Every Beginner Should Know

Conclusion

It is human nature to consider debt as bad, and therefore strive to pay it off as quickly as possible. However, your alternative is not guaranteed as well. You can choose to pay off your mortgage. And, watch your investment portfolio double while your capital is tied to your house. Or, invest and see your investment portfolio decline. No telling!

It is important to note that investments do outperform mortgage interest, therefore it does make sense to prioritize investment capital. That being said, if you are no willing to refinance to invest the equity to pursue those higher returns or liquidate investments to pay off the mortgage or increase the mortgage to fund investments, then the decision may be too complex for you to make rationally and shouldn’t be taken lightly.

Image credits: Top by Monstera via Pexels.

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Are you Investing, Speculating or Gambling Your Hard-Earned Money?

By

Irene Makanga

-

November 6, 2022

1

Are you Investing, Speculating or Gambling Your Hard-Earned Money

Whenever there is a discussion or analysis on a decision that entails potential profits and losses under risk or uncertainty, it is only that you ask yourself one simple question: Am I speculating or gambling my hard-earned money? It is important to recognize the rules of the game that you are playing. Understand the underlying stakes, the risks and the goals. As well as, understanding the role that luck plays in it.

If your goal and life’s work is to deploy strategies to build wealth and reach your goals, it is essential to understand the difference between speculation and gambling.

Many people these days have never really truly invested before. Thus, consider investing just another form of gambling – and therefore, rely on luck to win. Additionally, young people, these days are placing betting into their investment portfolios as a legit form of investing. As such, consider gambling as a viable investment for their money.

Difference Between Investing, Speculation and Gambling

There are many superficial similarities between investing, speculation and gambling, however, the real difference lies in the definition.

Investing is putting your money in financial schemes, shares, property or commercial ventures with the expectation of achieving a profit. Investors, employ their money to acquire certain assets after due diligence for a mid to long period, with the objective of wealth creation and additional income in the future.
Speculating is investing in stocks, property, or other ventures in the hope of gaining but with the risk of loss. An investor seeking to speculate typically employs their money to acquire assets to take advantage of functions in underlying asset prices in the short term.
Gambling is a game of chance for money; betting. An investor when gambling employs their money for entertainment, while the chances of return depending upon the probability of a particular situation or event.

Let’s dive a little deeper –

What is Investing?

Investing is what we should all be doing and it consists of opportunities that have a greater likelihood of being profitable. It means consistently working to grow your investment portfolio over time, not necessarily always seeking to beat the market. With investing, there is an expectation from investors of a return in the form of income or price appreciation. Additionally, there is an attempt to profit from ownership of financial assets i.e. value addition, return on investment or dividends.

Risk and return go hand in hand when investing, where low risk generally means lower expected return and higher return accompanied by higher risk.

What is Speculation?

Also referred to as trading, mainly done in the short term but investors can also go long-term with certain assets like real estate.

Speculating involves calculating risks and conducting research before entering a financial transaction. Therefore, a speculator buys and sells assets in hope of realising a bigger potential gain than the amount he risked. Thus, a speculator takes a higher degree of risk and knows that the more risk they assume, in theory, the higher the potential return. However, they also are fully aware that they may lose more than their potential gain in the transaction.

For example, consider an investor who trades in currencies. They may speculate that the Kenyan shilling will depreciate to Ksh 200 against the dollar by the end of a certain period due to the strong economic indicators. If their analysis is correct, they will sell their Kenyan Shillings and buy more United States dollars with the hope that the Kenyan Shilling will depreciate further to Ksh 200. However, if they are wrong, the investor can lose more than their expected risk. That is, if the Kenyan Shilling appreciates against the United States dollar, then they would have bought the dollar at a higher rate than the realizable rate in the future.

What is Gambling?

Conversely, gambling involves a game of chance – playing with a chance for stakes. Generally, the odds are stacked against the gambler as the probability of losing an investment tends to be higher than the probability of winning. This is because the gambler typically has little to no knowledge of what they are doing and thus has a higher risk of losing the investment.

For example, consider a gambler that opts to invest in the stock market without conducting any technical and fundamental analysis. If you are unaware of the current happenings in the world of business and finance in general, any decision you make will be like a gamble. The basis of the decisions you make hinge on your excitement and intuition.

Speculating Vs Gambling: Key Differences

Although there may be some superficial similarities between speculating and gambling, key definitions of both reveal the principal differences.

Speculation is a financial transaction with a substantial risk of loss and expected significant gain. With Gambling, the probability of loss is usually higher than the likelihood of winning. Thus, consists game of chance.
In financial markets, gambling is often evident in people who do it mostly for the emotional high they receive from the market’s excitement and action. Speculating, on the other hand, trading decisions are driven by market research and indicators.

Investing Vs Gambling: Key Differences

Some things that one might consider as an investment, may actually be a gamble. Let’s look at the similarities and differences between the two.

Investing and gambling both involve risking capital in the hopes of making a profile. In both, a fundamental principle is to minimize risk while maximising reward.
Investors always have higher odds than gamblers. Their assets, over time, grow and creates wealth. On the other hand, gamblers own nothing and play a game, where the house always wins.
Investors have avenues to mitigate losses such as selling the assets they own. Gamblers, on the other hand, have fewer ways to mitigate loss and tend to lose everything.
Investors tend to be more disciplined and have a wealth of information to research and base their investment decisions on. On the other hand, gamblers rely on emotion and intuition rather than knowledge.

The Bottom Line

Ultimately, gambling is like a tax on boredom. It can destroy your financial and mental health; I would not recommend it. Speculating is a different animal with some investing elements. It requires you to trade your night’s sleep for some extra profits. Investing is the most preferred – focusing on a passive investment approach: long-term ownership of well-diversified investments (equity, bonds and real estate).

Image credits: Top by lil artsy via Pexels

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NewsWeekPRO

NewsWeekPRO

Company

#1. Set Clear Goals

#2. Spend Less Than You Earn

#3. Invest Early and Consistently

#4. Diversify Your Investments

#5. Minimize Taxes and Fees

#6. Exercise Patience And Stay Focused

#7. Continuously Educate Yourself

Final Thoughts

1. Creatively Cut Your Budget

2. Pay Yourself First

3. Buy a Bidet

4. Take On a No-Spend Challenge

5. Stop Using Credit Cards

6. Search YouTube Before Paying a Professional

7. Reduce Your Subscriptions

8. Give Yourself an Allowance

The Bottom Line

1. Recession is coming – so analysts think.

2. Inflation and Interest Rates will ease – at some point.

3. Stock Market Volatility – Hii economy ni mbaya!

4. The Kenyan Housing Market is still growing and shifting to the tide.

5. Crypto Will Remain on the Fringes of the Financial System

6. Artificial Intelligence (AI) revolution in Personal Finance

By And Large…2023 will be a year like no other

Step 1: Identify the Land

Step 2: Conduct A Search At the Land Registry

Step 3: Outstanding Land Rates

Step 4: Aquire the Land Map

Step 5: Conduct Land Verification

Step 6: The Sale Agreement

Step 7: Land Control Board Clearance

Step 8: Land Valuation

Step 9: Transfer of Title/Land Ownership

Step 10: Receipt of Title

Step 1: Financial Foothold

Step 2: Financial Security

Step 3: Financial Mobility

Step 4: Financial Independence

Step 5: Financial Freedom

Step 6: Financial Power

Conclusion

Step 1 – Defining your financial objectives and goals

Step 2 – Gathering your financial and personal information

Step 3 – Analysing your financial and personal information

Step 4 – Development and presentation of the financial plan

Step 5 – Implement and review your financial plan

Conclusion

How Does A Recession Impact You?

How Do You Survive A Recession?

1. Prepare For Lower Income or No Income

A. Build a 12 -24 month emergency fund

B. Minimize high-interest debt

C. Prepare to borrow money

2. Look for Ways to Cut Costs

A. Delay major purchases

B. Buy in bulk if you can afford to

C. Buy from switching brands or buying generic brands

D. Cut Out Some Fixed Cost

3. Try to diversify your income

4. Don’t panic with your investments

Should you still invest during a Recession?

Conclusion: Don’t panic — recessions don’t last forever

The Accounting Perspective

Ownership Equity

Arguments to Own

The Investors Perspective

Cash-flow

Arguments to Rent

Tied Together – Example – Jane & John

Who Would You Rather Be – Jane or John?

The Verdict

Should I Pay Off My Mortgage or Invest?

Variable Investment Returns

No Guaranteed Return

Random Human Nature

Conclusion

Difference Between Investing, Speculation and Gambling