How to make your salary work hard for you

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Let your money work for you. Photo/AFP 

By PAUL LETIWA, pletiwa@gmail.com
Posted  Wednesday, September 15  2010 at  17:11

In Summary

SOME THINGS TO CONSIDER

• Having full financial freedom has to do with personal financial planning.
• Figuring out where your money is going is the first step towards taking control of it.
• If overspending is an issue, figure out which categories to reduce spending and plan to start paying off credit cards
• Put the money into income generating assets, since assets earn you money and liability burns your money
• The rich don’t accumulate cash. They accumulate assets that generate cash flow for them

When most people think about future careers to choose, they are always tempted to focus only on the potential salary they can earn. Most believe a decent salary gives one financial freedom.

Definitely, a big income always helps, doesn’t it? Having the money to pay all your monthly bills and going for those luxurious vacations tells all about your personal financial situation.

The reality, though, is that having a big income is not always the key to a secure financial future. As we found out, people have different definitions of what financial freedom means to them. Most believe it allows them to live comfortably.

But majority think financial freedom means earning a big salary and being able to afford such things as lavish vacations, expensive cars, boats, expensive clothes, jewelry, or luxurious homes.

To some, financial freedom is having an extra income, adding to their present income so as to boost their financial status. They search daily for low-risk, high-return investments, hoping to fall into a fantastic deal that will put them into a higher financial bracket.

Philip (he allowed us to use only his first name) works as a banker in the city earning around Sh150,000 monthly, but says the salary is not enough to sustain him, which is why he decided to operate a matatu business.

“If my salary was around Sh500,000, I would not be interested in getting an extra income elsewhere. I think it would have been enough. But I need more money to sustain my family and to settle my monthly bills.

I need to work hard to live a comfortable life,” he says during the interview with Money.
The banker says his current salary cannot guarantee him financial freedom.

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“I pay for my children’s school fees and I am repaying a car loan I took last year. I also depend on the same salary to pay for the house rent and to settle other bills. It is just not enough, I think I need more cash and a better salary to satisfy my needs.” Financial freedom is impossible to achieve with the current economic hardships,” he adds.

According to experts, the road to financial freedom is private and personal. They say one cannot rely on someone or something else to pave the way for their financial security.

“Unless you are committed to setting and keeping your financial goals, there is no salary, no matter the figure, that will give you financial freedom,’ says Mr Paul Muhami, a Nairobi-based financial consultant.

He adds that obstacles like fear of failure, laziness, negativism, bad spending habits, and lack of emotional and financial intelligence can block one’s path to financial success.

“This is why it is easy to argue that someone who is earning Sh7,000 is living a less stressful life than the one who takes home more than Sh700,000. The former is used to living a simple lifestyle, and can be able to cope and save part of the little salary he earns, aiming to start some income generating activity.

However, the latter is likely to be in big debt. For poor financial planners, big salaries always attract more debt and most high income earners spend their working careers repaying loans and other debts,” he says.

Mr Manyara Kirago of First Independent advisors and author of ‘How to become a Lifelong financial Success’, says earning a big salary can give one full financial freedom, if he or she sets their goals right.

“I have five clients who only depend on their monthly paychecks while each has a net-worth of over Sh100 million. Having full financial freedom has to do with personal financial planning. Figuring out where your money is going is the first step towards taking control of it.

With a monthly paycheck, the limit to your spending is listed in black ink. It would be better if spending was below that number,” he says.
According to Mr Kirago, majority of those who earn big salaries (like members of Parliament) always tend to spend a lot of money and eventually put themselves into a big trap of debts.

“In the world of finance, there is a saying that expenses rise to meet income. And this could be true when studying how most well-paid employees spend their huge cash.