Networth Update – September 2009

My networth continues on an upward trend and it is gratifying to note that this has been achieved only a short time after making a decision to manage my finances better. Only a few months ago i would have counted my networth in terms of my pension contributions and “assets” such as my car and household goods. Now i exclude the car and household goods from my networth calculations and concentrate on real assets that continue to passively work for me.

As at September, my Emergency Fund is still my number one priority and gets all the ‘bonus’ money i get from time to time. Its now at a healthy 78.3% of my goal and i plan to have it fully funded by end of year so that i can channel money to other investment goals. My overall networth went up a notch to 14.37% of my “15X40″ BHAG and being a long term goal am happy with the numbers so far. This goal has been broken down to a medium term goal of having a networth of Ksh. 4million by end of 2010 and this is at a respectable 53.8%. All’s well on that front.

On the stock’s front, i noticed that my portfolio had taken a hit in the months of July and August and clearly this had to do with the temporary upswing in the market which was then followed by general decline. As i intend to rely on the principle of Dollar Cost Averaging, i have treated this as a minor blip in the overall scheme of things. With regular purchases in the coming months and hopefully an upward swing in the market, i should be able to meet my target by December. As things stand now, i am at 71.7% of my goal which is to have a Ksh. 500,000 stock portfolio by end year.

To view my progress bars, visit my Progress Page.

Why Prudent Financial Planning Pays Off

One of the best illustrations of how two people earning the same amount of money can end up in significantly different financial circumstances can be found over at The Simple Dollar blog. The scenario presented is that of two guys, Alan and Bob who earn $50,000 at age 25 and get similar raises over time. Bob, being the brighter one sets aside 10% of his income and invests it while Alan lives it up and spends every dollar he makes. Like many Kenyans, Alan projects the lifestyle of someone who has “made it” and drives around in the latest luxury car (a Lexus) which if the guy lived in Nairobi would be an E200 Kompressor or 320i Beamer. He would probably be living in a 60,000 shillings per month 3 bedroom flat in a suitably classy location such as Kilimani while spending most of his evenings buying premium whiskies at 500/- a shot. Well, who wouldnt want to live this this?

Bob on the other hand lives a simpler life in South B or Langata and doesnt feel out of place with his Toyota 110 or Premio while preferring to avoid overpriced beer and having fun at his neighborhood pub or having a house party with pals. Note that he doesnt force himpself to live in a patently unsafe neighborhood nor force himself to take a matatu to work despite being able to afford a car. He also doesnt deny himself some well deserved entertainment when the occassion calls for it. But he chooses not to spend EVERY single dime he earns. He puts some money aside and earns interest on the savings while Alan invests nothing. Just to be clear, it is obviously okay to drive around in a Merc and live in Kilimani as long as it doesnt cost you your last penny to live that lifestyle.

Back to our story, as the case of Alan and Bob progresses, the two soon have the same lifestyle and drive the same car even but the difference being that Bob has substantial savings and investments while Alan has none. By age 55, Bob is clearly way ahead of Alan in terms of standard of living, all because of clever choices made some 30 years earlier.

Now are you Bob or are you Alan?

Personal Finance And The Gender Gap

An interesting article on Reuters caught my eye as it continued to explore the much-investigated “gender gap’ between males and females, this time on my pet subject of personal finance. According to Reuters:

“Men and women handle their personal finances much differently, research shows, with men more likely to keep a close eye on their spending and investments and to pay their bills on time. The data showed two-thirds of men but just one-third of women said they regularly pay their credit card balances in full, said Liz Davidson, chief executive of the company based in Manhattan Beach, California. Also, 90 percent of men said they pay their bills on time each month but only 74 percent of women said so, it said. It said 71 percent of men but 53 percent of women have a handle on their cash flow so they spend less than they earn each month. More than half of men but just a third of women said they have an emergency fund to pay their bills for a few months if they lose their job, it said. Forty percent of men but just 24 percent of women said they were confident their investments were allocated appropriately, while 73 percent of men but just 40 percent of women said they had a general knowledge of stocks, bonds and mutual funds.”

I would actually have said that women are more likely to pay off their credit card balances in full but obviously i was wrong. I find a lot of my female friends find money talk quite exasperating while men will talk about it for hours. Not to say however that the talk always ends up in wise financial decisions. However, lately a lot of women are becoming very keen on managing their finances and this can be evidenced by the large number of women-only investment groups. Impulse shopping i guess contributes a lot to spending more than you earn and this may afflict the womenfolk more than the men seeing as i can walk around an entire shop and actually find nothing worth buying..shoes and clothing included. I would be seriously tempted in an electronics shop but obviously you cant pick up anything worth Ksh. 1,500 like you would a shoe. I was also thrown a bit by the “Emergency Fund” findings. I could have sworn women are better are setting aside money for a rainy day!

According to Reuters, most of those answering the questionnaires earned between $60,000 and $75,000 and were assessing their own financial situations from January through April 2009. Do you think the findings would have been similar if the survey was conducted in Kenya?

Networth Update – June 2009

I should have done this 2 weeks ago but life has a way of disrupting your best laid plans. Since i started on my road to financial freedom, i have always enjoyed reviewing my networth growth. Like everyone else, i always wish i had lots of money coming in from multiple streams which would make the process of reviewing my networth almost like winning the lottery..pur exhilaration! Alas, my income streams are few and not as big as i would wish.

Nonetheless, it is always gratifying to see a healthy bump in my networth each month. My BHAG is up to 12.1% which though a low number is a positive step towards achieving my “15×40″ goal. My stocks are a nice surprise after the recent downward trends at the NSE and i have noticed some appreciation there. Definitely looks like my target of half a million stock portfolio by year end will be achieved since am at 78% at the moment.

I have thrown in any extra money i got last month into my Emergency Fund and this has grown the fund to a healthy 58.3% of my goal. Once I have this fund to tide me over for at least 6months, then i can channel my funds into more aggressive stock purchases or even real estate. For now i will continue throwing every extra cent i can get towards the fund.

To view my pretty progress bars, click on my Progress Page.

Living In Debt And Living It Up

Been out of town a couple of days now and like everyone else been engrossed in the Michael Jackson story which threatens to get juicier with each passing day. Already we know that the King was bald, weighed a measly 51kg, was willing to do practically anything to get some sleep, had a face full of scars etc etc. But more astonishing for me is the fact that the King of Pop actually was technically bankrupt due to the amount of debt he was carrying at the time of his death.

According to Fox News, the guy had amassed debts of upto $400million despite earning millions of dollars in the course of his career.

Yet after selling more than 61 million albums in the U.S. and having a decade-long attraction open at Disney theme parks, the “King of Pop” died Thursday at age 50 reportedly awash in about $400 million in debt, on the cusp of a final comeback after well over a decade of scandal.

When he ran into further financial problems, he agreed to a deal with Sony in 1995 to merge ATV with Sony’s library of songs and sold Sony music publishing rights for $95 million. Then in 2001, he used his half of the ATV assets as collateral to secure $200 million in loans from Bank of America. As his financial problems continued, Jackson began to borrow large sums of money, according to a 2002 lawsuit by Union Finance & Investment Corp. that sought $12 million in unpaid fees and expenses. One forensic accountant testified that the singer had an “ongoing cash crisis” and was spending $20 million to $30 million more per year than he earned. In March of last year, the singer faced foreclosure on Neverland. He also repeatedly failed to make mortgage payments on a house in Los Angeles that had been used for years by his family.

It sounds incredible that someone earning that kind of money can actually find himself in debt, Ksh. 3.2billion for that matter. But it merely reinforces the often repeated argument that it is really what you keep that matters and not what you earn. Mortgage payments? The guy had mortgage payments?

What Is The Right Age To Start Saving?

If like me you are an avid reader of all matters to do with personal finance, the cartoon (see below) of a toddler fretting over his lack of savings is a hoot. I simply loved it! But beneath the humour lies a deeper question that all of us ask ourselves at some time or other: “When is the best time to start saving money?”

Usually the typical Kenyan goes through his/her twenties thinking “Am too young to worry too much over the lack of savings” and then find themselves in their mid-thirties, kids and mortgage to boot, and thinking “My paycheck is too stretched to be able to save anything”. Then on to the fifties when the kids are through with school and retirement looming large then the thinking changes to “I wonder how long my pension savings will last me before i have to depend on my kids”. Now this obviously is not the case for all Kenyans but describes a general path travelled by many especially those who depend on a paycheck all their lives.

In my own case I hardly gave a thought to savings through my twenties on the basis that I really couldnt be expected to save anything on the kind of money i was getting from my employer. Although the money was indeed not anything to write home about, I had few fixed expenses (rent and food) and I even managed to buy my first car on the same meagre paycheck. As i moved jobs my pay kept on rising but i saw no urgency in getting started on savings. Soon enough the big three-Oh came and passed and yet i still had no savings and no worries. However, it was beginning to dawn on me that my dream of being rich had a very real chance of going up in smoke unless i hit on a big business idea fast. Although i had no problems with a middle class lifestyle, i wanted a life of financial freedom. Thankfully, in my thirties i realised that, big business idea or not, i could still attain a life of financial abundance thanks to the time-tested concept of “getting rich slowly”. The more i read up on the subject the more convinced i got that indeed this was not only viable but could also be attained before i was too old to enjoy my money. Obviously, the key plank in the “get rich slowly’ school of thought is the idea of saving and investing regularly and i embraced the saving culture with zeal. Looking back, i wish i had started earlier but the question is, when is the right time to start saving?

An interesting piece on CNN Money shows a chart depicting the difference in networth between someone who starts socking away money at 25 and one who starts ten years later at 35. Each of the individuals saved a $400 monthly except that the guy who started at 25 saves the money upto age 35 then stops and leaves the money earning a 7% return till the age of 65. The other starts at age 34 and saves the same amount of money from age 35 to age 65, same 7% return. The first guy (lets call him “Early Start”) amazingly has a higher networth of USD 602,559 at age 65 compared to the other fellow (“Late Start”) who has USD 528,222 at the same age. Considering that Early Start only saved for 9 years and then let the power of compound interest do the rest, it is a very strong case for starting early.

Now in Kenya, most 25 year olds are just out of college and earning minimum wage. Add to this the fact that the priority for most at this age is to acquire some sort of “life” for themselves meaning purchasing a car, buying some furniture, paying back their HELB loans and for others supporting their parents and siblings. I found that it was easier to save when i had acquired most of the furnishings and furniture for my house plus a car as it reduced the pressure on me to “spend spend spend”. However, it would still be a good idea to contribute fully to one’s pension scheme at whatever age as the money is deducted directly before one receives their pay. In addition, one should try and save even the littlest amounts starting from the day they receive their first payslip.

I find the chart so inspiring. Is there a better time time to start than now? After all, they say that “Where there is a mountain to climb, dont think that waiting will make it smaller“

Early Start