• You need to acquire wealth-generating assets and manage your debt
Sh15.2 billion. That's the combined net worth of the 24 persons nominated to serve in President William Ruto's first Cabinet.
While being vetted in Parliament, each of the Cabinet nominees revealed their net worth. Their wealth consists of land, buildings, cash in bank accounts, motor vehicles, corporate shares and mutual funds, among others. The revelations provoked intense discussion among Kenyans. Most of us would value our wealth in the hundreds of thousands, rather than the billions quoted by the Cabinet nominees.
John Schmidt, an editor at the Forbes financial advisory magazine, describes net worth as the value of assets minus your liabilities. Assets consist of homes, real estate, motor vehicles, jewellery, household items, retirement accounts, bonds, stocks, mutual funds, cash value of life insurance, bank accounts and hard cash. Liabilities include outstanding mortgages, car loans, student loans and any other loans.
If you owe more than you own, you have a negative net worth. If the value of your assets is higher than your debts, you have a positive net worth. "When you count up all of your assets and liabilities, you can understand what's working in your financial life and fix what's not," Schmidt says.
Not all assets create wealth. A wealth-creating asset is a possession that generally increases in value or provides an income. That's why many wealthy Kenyans invest in land and rental buildings. Possessions such as cars, big-screen TVs and designer clothes are assets, but they don't rise in value. A car is a useful tool if it helps you get to work or do your business.
Martha Karua, the Azimio Deputy Presidential candidate in the last elections, provides a good example of how rising property values increase personal wealth. At the DP debate held on July 19, Karua was asked about her net worth. "I think just about Sh150 million, and that is because the Sh56 million I had declared in 2013 has appreciated. I haven't had any new properties," she told the panel.
How do we increase our net worth?
1. Savings: The first principle to wealth accumulation is saving, but you must save deliberately, not wait to save what's left. Prepare a budget for how you will spend and save your income. Set personal financial goals; for example, save Sh5,000 per month for five years in preparation for building a home. Be realistic about your income, establish a deadline and make a savings plan.
2. Acquire wealth-generating assets: Land and buildings grow in value, while machinery can make products to be sold or provide a service. Even simple equipment such as spades and wheelbarrows are being hired out to construction workers at Sh100 a day.
3. The power of compounding: If you prefer keeping money in financial institutions, look for bank accounts that pay compound interest. This is a type of interest paid on previously earned interest as well as on the original deposit or investment. Compound interest helps you build wealth faster.
4. Beware of risks: Investing is not a get-rich-quick scheme. Generally, the higher the risk of losing money, the higher the expected return. For less risk, an investor will expect a smaller return. Take a long-term view by putting money into low-risk investments and keeping it invested for five, 10, 15, 20 or more years.
5. Manage your debt: Avoid shylocks and predatory lenders who promise quick, unsecured loans. Their high fees and interest rates make it very expensive to repay the loans. If you are borrowing from one lender to pay another, you already are in a debt trap.