Five decisions that could ruin you financially

1.       Taking unplanned mobile app loans

Mobile loans like Tala, Branch and M-Shwari are all the rage nowadays, but many do not think through their decision to take the loans which are really easy to get. They are more expensive than people realise, as their interest charges are between 7.5 and 15 per cent per month, which translates to between 70 and 180 per cent per year. These loans usually have a one-month payment period. Therefore, assuming you take a loan of sh20, 000 in a certain month, you would be paying back between sh 21,500 and sh23, 000. Most people usually take the loan, then repay it and immediately take another one of a similar amount. If you take a sh20, 000 loan every month, you will end up paying interest of between sh18, 000 and sh36,000 every year. It becomes even higher if you default, as there are penalties for that.

What you should do instead:

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-          Plan monthly income to meet all expenses to avoid shortages and needing more money.

-          Borrow for investment and not for consumption. Investments can grow and pay back the loan.

2.       Paying too much for house rent

Rent is usually most people’s greatest expense, but if you are using around 50 per cent of your income to pay rent, that is too much. It can prevent you from meeting other important costs and have long-term financial consequences. Your rent should ideally be a maximum of 15 per cent  of your income to ensure that you do not wreck your finances, and that you  have enough left after all your expenses to save and invest.

What you should do instead:
 
-          Research and compare prices of rental units and those of other dwellers.
 
-          Consider living at your parents’ home for a while and save/invest what you could have been paying as rent.
 
-          If you are single, consider having a housemate or two to split rent costs with.
 3.       Cryptocurrencies

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Most Kenyans do not understand how cryptocurrencies like bitcoin work, but many have rushed to invest in them because they are the newest seemingly lucrative thing.  However, they lack legal protection mechanisms, and this can easily lead to you losing your money with no legal recourse, thus you will never get it back.

What you can do instead:

-          Do a lot of research before investing in any cryptocurrency.

-          Only invest in local cryptocurrencies that are linked to organisations that you can hold accountable should something go amiss.

4.       Rushing into investment fads

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Most people remember the quail debacle that many eager investors fell for and got burned by, but it is far from the only one. Every once in a while, a fad will come up that is highly speculative, but guided by herd mentality, people will rush to pour their money into it. A current example is whenever plots are advertised, and generally buying without a technique and without a plan. Buying plots of land that everyone else is buying for instance, usually ends up working against you. It will take long for you to get back returns as the value of the plots will decrease. This is because some people will rush to sell theirs at lower prices in order to get their money back, thus compromising the value of land around the area.

What you can do instead:

-          Employ counter-cyclical investing, which means that you should not spend your money when and where everyone else is doing so, or simply, avoid the herd.

-          Seek professional advice before investing

5.       Guaranteeing for Sacco loans

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Guaranteeing a loan means that you have agreed to take on someone else’s debt should that person fail to pay it. In Saccos, you are usually a number of co-guarantors for one person. People usually just sign up as co-guarantors as long as they are in the sacco without considering the consequences should a person really fail to pay it, which can happen in a number of ways, like the person disappearing or dying. The money that you will pay back did not come to you and did not help you in any way, therefore you will be creating an expense you did not plan for.

What you can do instead:

-          Only guarantee people that you know and trust.

-          Only guarantee amounts you can pay in case they default .

Source: Everlyne Ombasa, a research analyst at PineHill Consulting

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