Everybody wants to be rich but being rich is not always the answer to financial security. Creating wealth, on the other hand, will carry you far into the future and if you are lucky, even your children will be secure because you thought ahead.
What is the difference between being rich and wealthy?
Let me break it down,
When you are rich you have material things in plenty, you may also have a lot of money in the bank, and you also have an income. If anything happens to your capability to earn like say you are incapacitated, or your job ends, or God forbid your business burns to the ground, you may not have much to fall back on.
A wealthy person, on the other hand, makes the money work for them so that even when they cannot or will not work, their lifestyle will remain the same. If you went for lunch out every Monday, you would still do that when your job ends. If your kids go to a high-end school, they will continue attending the school .
The most significant problem you may have is the imagination that since you have a small income, you cannot be wealthy. Well, I beg to differ. There are a few ways in which you can save a fraction of that small income of yours and start your way to wealth building. A little always goes a long way with savings.
Let us dive in:
1. Open a Savings Account
A savings account is essential especially if you are battling with discipline and need a way to have access to your money but in a limited way. Savings accounts allow you at least 7% interest annually and restrict the amount and the number of times you can withdraw money from your account. That way you can have a head start on your wealth creation goals.
You probably have a bank account and you probably almost skipped this step until you realized that the features of your bank account are not the same as the ones I have mentioned. That is because, before October 2016, current and savings accounts were almost indistinguishable. You had to decide on your own how to use your account.
To know if you have a current or savings account, you will need to answer the following questions. Does your bank account:
- Have restrictions on withdrawal?
- Earn any interest?
- Have any contractual obligations you made recently
That was a mouthful, let me explain:
Currently, banks are mandated by law to pay you interest on your savings. However, for this to be effective, you cannot be withdrawing money all the time since there will be no way to determine how much interest you should receive.
For this reason, you will sit down with your banker and agree on an amount of time within which you will not withdraw money from the said savings account. You will then be paid interest at the rate of 7% per annum.
Do not make the interest rate your primary target. We are trying to learn how to save. Just give yourself a goal for a specific period of time, like, say a year. If you would like, for instance, to have Ksh. 12,000 by December and it is January, you will need to put in at least Ksh. 1000 per month to achieve your target. The interest is just a bonus.
If you do not have a bank account, this list should help you with selecting one.
But what if you hate going to the bank, and you struggle with discipline what should you do?
Bank halls can be horrible places, so many long ques and all! Fortunately most banks have embraced mobile banking where you just use your phone to make payments.
I know having the saving discipline can be a struggle in the beginning. To help you out, have a Current account as well. Your current account is a ‘free account, ’ and you can perform all your transactions on it without interfering with your savings.
Another thing you can do is to set a standing order for the amount you save each month. A Standing Order credits the amount you set without you having to perform the transaction yourself each time. Let the date of the standing order be a day or two around the time you receive payment in your account. If you have discipline issues the transaction goes through before you get a chance to take all your cash out.
A savings account that you do not touch may eventually make you wealthy, but I may also be a good idea to invest some of that money for higher returns than the 7% here. Take note that this will not be an overnight thing, patience and discipline will, however, give you the best results.
2. Join a SACCO
SACCO refers to a savings and credit cooperative society. Initially, they were meant to help persons in the same profession. For instance, there would be a SACCO, for bankers, tea farmers, teachers and so on and so forth. However, in the recent past, the organizations have opened their doors to accommodate members from all works of life.
So what do you need to join a SACCO?
The requirements vary from each specific organization to another, but the basic ones include: You should;
- Be of legal age, which in most cases is 18 years old and above.
- Have a legal identification document such as an ID card or a valid passport
- Pay a registration fee to join, this varies, but the minimum should be Ksh. 500(approx. $5)
- Contribute the minimum required amount each month or any amount above the minimum that you may decide on.
The monthly contribution amount is usually a minimum of Ksh.1, 000 (approx $10) but can be higher or lower depend on where you enroll.
For specific details, you should visit the SACCO you are interested in joining. Here is a list of the best-managed SACCOs at the moment to help you out.
How does a SACCO work?
Your monthly contribution, also known as savings counts as your shares. Unlike in a commercial bank, you do not merely withdraw your funds rather you take a loan than you repay with interest.
The loan amount you qualify for depends on your savings. You will generally be eligible to between two and five times your savings depending on your SACCO rules.
Why Should You Even Bother About SACCOs?
There are a few advantages that SACCOs have over banks that might make them a safer choice. You should consider them because;
We have seen above that your savings qualify as shares. Every year, you get dividends. Here is a post with some insight on individual SACCO dividend payouts.
What is more, some SACCOs allow you to take loans against your dividends which ensures your savings intact while you still have the cash for your projects.
It is far much easier to get a loan you only need to have savings with them; all you need is savings and a few guarantors. With banks, you may require collateral and even then due to the capping of interest rates you may get a bit of the run around before you get the loan and your application still has a tremendous chance of not going through especially if you are just starting out.
Loans will help you with more prominent projects and investments. Do not take credit for noncapital items. Do not take a loan to buy a car for personal use. Cars will not appreciate and they also come with additional cost. Taking a loan to invest in land, stocks or bonds may be a better alternative as they have a higher appreciation potential with minimal costs.
They promote a savings culture.
Every month you should contribute, and this helps you learn discipline such that even when there is no SACCO in the future, the habit is ingrained in you.
Take Caution When Joining a SACCO
Over the last few years, there have been many cases of SACCOs defrauding Kenyans and then collapsing. There is nothing as painful as losing your hard earned money.
You should always make sure you do your due diligence. Google the SACCO, if it is dodgy, chances are someone will vent on Google. Also make sure you check out this list of registered SACCOs and read this post about deregistered SACCOs.
And we move on to
3. Make an Investment for the Future
This topic deserves a whole blog post on its own which is coming up soon. In the meantime, since you are a beginner, I would like to share the simplest investment options to aid you on your wealth creation journey. You have probably heard before that you have to be willing to lose if you want to invest. The first investments we will speak about are the least risky, meaning you have a very high chance of getting back your money plus interest.
First, we will look at short-term investments;
The money market
These are short-term securities. When we say short term in Finance, we mean less than 365 days or a year. The money market comprises treasury bills sold by the government.
Initially, trading was a complicated process. You would need to have a broker and wait for them to do the work for you. Today, the process is a bit easier all you need is
- A bank account
- A CDS account (this is just like a bank account, but instead of money it holds shares or treasury bills and bonds). You can find more information on the Kenya Central Bank website.
- The cash required to purchase the stock
Purchasing the treasury bills on your own may be daunting since you need at least Ksh. 100, 000 (approx $1000) which is the face value of each bill. That is why insurance companies have come up with a product to help you out.
There are several insurance companies that will make your wealth creation process a little bit easier. What the companies do is to buy money market securities in bulk and sell them to you as fractions. For instance, instead of coughing up the whole Ksh 100,000, you may purchase a product for which you pay Ksh10,000 and when the investment matures you get a share of the interest.
Let us put figures to the story so you can better understand it.
Treasury bills go for Ksh 100,000. For 364 days you earn an interest of 11%. But you purchase unit trusts at Ksh. 10,000. On maturity, the bill will yield Ksh 11,000 in interest. You are going to get
Next, we are going to tackle long-term investment options;
The government issues bonds to finance its projects. A bond document signifies a loan you have given to the government, and they pay you back with the percentage of interest stated on the face of the bond.
Long-term investments mature after any period longer than 365 days.
The face value of a bond changes depending on the cost of each project that the government needs the money to finance. You can always check this page for updates on when bond advertisements are put up.
Insurance is a less common method of investment. It has a lot of potential and can work well with the other methods. It needs a lot of patience. Do not go into this looking for a fast payout. Also stay away from education policies for this.
Full Life Insurance Cover
The cover may not be beneficial to you but to your beneficiaries. A full payout is given to your heirs upon your death. The lumpsum will come as a relief to them even for funeral services. Speaking of your death is eerie, I know, but at least it ensures that your family will be taken care of even after your death and especially if you are the breadwinner.
Money Back Life Insurance Policy
This policy is half life insurance and half an investment vehicle.
You take out a policy for which you pay a monthly premium. The policy matures after at least three years. The longer your policy is, the higher the payout should be, but the maturity amount will also depend on the premium amount you pay.
If you die before the policy matures or you become incapacitated, you get a payout. Each policy document varies from another, and it is imperative that you read it thoroughly before signing. I also learned a trick from a forum, always try and talk to another company employee other than the one selling you the product to corroborate the terms.
If you do not understand the document, ask an expert or friends to help you out.
Remember, ALWAYS read the fine print.
Here’s the thing:
All the methods we have talked about above may not work for you if you do not set financial goals for yourself. Not only that, when setting your goals ensure that they are SMART.
What do I mean?
SMART is an acronym for:
You want to be very specific about what your wealth creation goal is. What at the end of the process do you hope to gain? For better results, you may want to break down your goals into shorter time frames. For example, a five-year goal can be divided into five steps that you should achieve on an annual basis.
Overall take away
Do not start on the path to wealth creation with a get rich quick mentality or you are going to be thoroughly disappointed. Watch this video of Peter Nduati CEO of resolution insurance; you can start something with nothing because everyone has a skill they can utilize.
This other video will show you that earning more money will not necessarily make you wealthy until you make a conscious decision to be wealthy.
There is no shame in starting small. All you need is to decide that you want to be financially independent and then, start. I wish you the very best on your journey.
Should you have a question or comment, write it down in the comment section. Maybe you have made progress and want to share your journey; you are also welcome to tell us your story in the comments. As always it has been a pleasure writing this piece to assist you.
Do not shy away from adding to this list it is not exhaustive.