Breaking free from salary dependency Some salaried employees often go through what can be described as a tragic cycle of saving, borrowing and repaying in a set number of years. Considering that many people are employed in their mid-20s, and that each cycle of saving, borrowing and repaying may take eight years, one can only make use of a maximum of four such cyclical loans in his or her working lifetime. Often, the first loan is used to purchase a car or land, the second to build a house or start an income generating project; the third for tidying up all loose ends in ongoing projects that often includes unfinished houses! Throw in school fees and by the time of the second and third loans you have a complex situation where the financial goals and priorities are a little muddled. And the ease with which financial institutions are hawking top-up, buy-out and mortgage and education loans on a check-off basis simply lures such borrowers with the possibility of starting all over again minus previous mistakes. But this easy credit simply ensures that life is one continuous circus of borrowing and repaying, the consequences of which spill into retirement for some. SOCIAL MISFITS Content in their comfort zones, some professionals have no clue how to get out of this rut. Their lives and financial destinies have been effectively sealed by a dependency on their pay slips and a stoppage of work, for whatever reason, would haul them into instant poverty. In the unfortunate event that such professionals are sacked, their apparent social standing instantly changes from riches to rags. From flaunting swanky home entertainment systems, space age mobile phones, posh cars and expensive household items - which are often bought on credit - such people frequently have nowhere to keep these conspicuous consumer goods save their ancestral homes in the rural areas. Their children, conditioned to live in the fast lane, often become social misfits in their new environments, compounding the problem of adjusting to their parents’ loss of a salary. And all this is for lack of financial foresight when the going was still good. According to Patrick Oluoch, a personal financial banker, the journey to financial freedom for a salaried person starts with saving. “It does not matter whether you earn Sh10,000 or Sh1 million per month but if you have no deliberate saving plan, the money will always be sufficient for your monthly spending, deepening the dependency on your salary,” he says. “People need to understand that a salary is not an end in itself but a means to an end and spending every shilling that one earns without making tangible income generating investments is folly.” Oluoch advises people to form the habit of putting away at least ten per cent of their earnings consistently from the first salary. This can be done through a bank savings account or by a check-off system with a savings co-operative society. This banker adds that often the descent into salary dependency is quickened by spending more than what one makes. “If you are occasionally going for salary overdrafts and credit card debt halfway into the month, you need to take stock of the direction you are heading by tracking your expenses,” he says. Oluoch advises people to categorise their spending to see where their money is going. “See if its your car, entertainment, clothes, household overheads, travel and so on that is taking an inordinate chunk of your salary with a view to cutting down,” he says. Noting that everyone gets behind occasionally, Oluoch advises salaried people to create enough ‘wiggle room’ in their budgets by spending less than they make to accommodate unexpected expenses. “If it means cutting back on pay TV, pub visits, magazine subscriptions or eating out, so be it,” he says. VICIOUS CYCLE Cyrus Kamanu is a middle-aged civil servant with a good salary. But in his heydays, he did everything wrong as far as his finances were concerned. “I lived in the best estate at every station I would work and got the biggest house commensurate with my title,” he says. His family shopped in the most expensive outlets and went to classy hospitals. “I was often broke by the 15th of the month and would wait anxiously for the next salary to repay the debts, spend the rest and continue in the vicious cycle,” he says. “One day, a subordinate staffer asked for time off to sort out a case of livestock theft on his farm,” says Kamanu. He got curious and dug a little for more information. “I learnt that the man, who earned only one-eighth of my salary, had ten milk cows and was getting a steady income from them. It was then that I took a hard look at my situation,” admits Kamanu. He realised that he had no plan B to fall on should he lose his job. “I embarked on some drastic changes and invested. Today, I only go to work for comradeship, not to make ends meet,” he says. Kamanu advises salaried people not to fall into the trap of cyclic loans and instead take one big loan for an initial investment that is guaranteed to have good returns. “With a steady income from an investment, one can take care of one’s needs and live debt-free in retirement,” says Kamanu.
Posted on: Sat, 13 Sep 2014 11:26:35 +0000
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