“Allocating time and money in the pursuit of looking superior often has a predictable outcome; inferior economic achievement” (From The Millionaire Next Door).
With our lifestyle and consumption culture, many of us are speeding down the highway of poverty. The journey on this highway is not dependent on the level of income. In fact high- income earners are fast overtaking everyone else on this journey. Say you have a headache. You can choose to buy either a good quality painkiller or the cheaper counterfeit version. The counterfeit version may end up killing you right? There is true wealth. Then there is also the counterfeit version of wealth – which has only one outcome: POVERTY.
John is a senior manager in a multinational company with the kind of job title that opens big office doors. He earns a net income of Kes 500,000. He lives in a house and drives a car befitting his status. His job is extremely demanding and he rarely has time to pursue other interests. He is currently considering accepting another job offer, where he will earn Kes 620,000 per month. After living expenses, school fees, entertainment and debt repayments, John is able to save 100,000 per month, representing 20% of his income. He has invested in land, shares and his portfolio is worth about Kes 5 million. He thinks he is doing well and so does everybody else around him. To the untrained observer, John is RICH because of outward appearance. With Kes 5 million in assets and as impressive as it sounds, John can only survive for about 12 months based on his current expenses if he lost his source of income. John is considering taking this new job on the basis of increased income. However this job will take up more of his time and John will only ever be able to pursue passive investments that he does not have to be directly involved in. His source of income will be his salary and unfortunately he will consume more the more he earns. Should he lose his job or even consider leaving, he has to figure out how to replace a Kes 500,000 lifestyle. Any opportunity that comes his way in his mind would have to align both in status and income to that level.
Nyambura delivers meals to John’s office. A year ago she was working as a driver earning a net income of Kes 15,000 but got retrenched. She decided to start making snacks for sale to sustain herself while waiting for another job. She recently got offered a job for Kes 25,000 and turned it down. She started on a small scale but is now currently servicing two buildings and has employed an assistant. She sells 200 mandazi’s (at Kes 20 per piece) everyday and currently has 20 lunch orders (at Kes 100 per meal). She wakes up early and cooks from her house. She makes a daily income of Kes 6,000 and is able to retain Kes 4,000 after costs. Every month her business gives her Kes 60,000 after costs. She is able to save Kes 40,000 after personal expenses. She currently saves 67% of her income. She has now saved up Kes 400,000. Kes 300,000 of this she will be using to buy a piece of land upcountry to start chicken rearing. Her brother who lives there will run that business. She expects to make about Kes 20,000 per month after all costs taking her total personal income to Kes 80,000. Nyambura lost her job and got kicked out of her comfort zone very quickly. Her immediate challenge was replacing Kes 15,000 (and not Kes 500,000 like John). There was really no status to align to and she was ready to do whatever it takes. Her savings of Kes 400,000 can ensure her survival for 20 months were she not earning an income. More importantly she is able to use her time effectively to build diverse sources of income such as the chickens that do not necessarily rely on her full time. If she finds another building to supply snacks to – her income increases – simple as that. Her investment approach is active – it’s not just about buying land that will remain idle and be a “nice to have” but doing something on it that will increase her income.
John buys mandazi’s from Nyambura. He has no idea of the economic impact of her deceptively simple choices. Nyambura has developed an instinct to increase while John has developed the instinct to work and consume. While John’s attitude to money is spending and saving a little, her attitude is multiplication and saving most. John will continue working for a lifestyle and trying to find bigger salaries for that lifestyle. Nyambura will continue working to create income streams that will comfortably be able to sustain the lifestyle she chooses to have. John is tied to an image and will wait for opportunities that align to that image. Nyambura has no social status to live up to, therefore is able to grasp opportunities very quickly. Nyambura has learnt the value of her time and what that time can create. John’s time is valued for him by a salary. In summary, John is creating a life of dependence, where he has to work to eat. Nyambura is creating a life of independence, where she can always eat as her assets are working for her. John remains driving a big car on the highway to poverty. Nyambura without a car is way ahead on the highway to wealth. She knows it is not about how much you earn but how far you can replicate what you earn. Which highway are you on? Let me know.
Waceke runs a program on Personal Financial Management. Find her at firstname.lastname@example.org| Twitter @centonomy| www.facebook/centonomy
Question and Answer
I want to start planning for college education for my daughter. She will be going in approximately 10 years time. What should I consider?
You need to look at what education will cost at the time you want your child to go to school. Do not work with what it costs today, otherwise you will find yourself unable to afford it at the time. Because of inflation every year school fees will increase so work with what it will cost then and this will start to give you a good estimate of what you need to start saving.
Email your questions or comments to Waceke her at email@example.com| twitter @centonomy| www.facebook/centonomy