Every straight-thinking Kenyan has on one occasion or another read a personal finance article and encountered rule after rule. Whether it’s that credit cards are evil or that school loans are ‘good’ debt, these rules all have their place. Viewing these rules as inviolable is what makes the rules dangerous for your financial health. Hustle speaks to financial adviser Peter Wainaina who busts some common myths he has encountered in his years of practice:
Myth 1: I’m young and healthy. I don’t need life insurance.
Why fix it when it’s not broken, right? But really, insurance is not just about whether you think you will need it or not. “There are benefits to purchasing life insurance when you are young and healthy because you will pay lower premiums. Rates will always be based on the individual’s health at the time of purchase. This affords one the opportunity to lock in lower premiums, and the potential of building guaranteed cash value through whole life insurance,” Wainaina says.
The sooner one buys life insurance, the sooner they can start building that cash value, which can be utilised for both opportunities and emergencies. Even if the death benefit itself is no longer needed, the cash value could eventually be used to supplement retirement income. So, think of life insurance as an investment rather than an expense. For those who are married, it is also important to note that funerals are expensive, and in the event of your passing on, you don’t want to put any family members at a financial disadvantage.
Myth 2: I should be debt-free before I invest
- 1 How to apply past financial lessons to today’s crisis
- 2 How to apply past financial lessons to today’s crisis
While this is the Dave Ramsey approach and you may feel inclined to follow it given he has a net worth of $55 million, it may be disastrous. Investing is not a one-fits-all approach. Suppose you are waiting to be debt-free to invest, what happens if you suddenly lose your job? While doubling down on debt, especially if it’s attached to a high-interest rate credit card is smart, you shouldn’t necessarily neglect savings or investment entirely.
“Paying off your debt means reduced stress, lower risks, and a greater ability to withstand personal emergencies. Investing means building a reserve that can protect you and your family and provide you with sources of passive income. Therefore, both are necessary to your financial well-being,” Wainaina adds.
Investing whether you have debt or not, moreover, is a habit that you should develop early in life so that you move ahead towards a financially secure future.
Myth 3: You can only invest if you have a large income.
Many plan to save whatever is leftover at the end of the month. But then, nothing is ever leftover. If you fall prey to this line of thought, then you need to know the golden rule of saving, which is ‘Pay yourself first’. What that means is that you should set aside money for savings and/or investment before anything else.
“Whatever your level of income, you need to save at least 10 per cent of it every month. Your ability to save and invest has nothing to do with your income,” Wainaina says.
In case you have very little self-control, try to set up an auto-deposit into your savings account. You can’t spend what you never had.
Another variation of this myth is ‘Personal finance is only for people who already have money’. If you think finance is all about the stock market, interest rates and insurance premiums, then you are mistaken. Personal finance is for everyone and is about managing your individual situation, actions and attitude in a manner that’s best for you. If you feel too intimidated, find a credible financial advisor to help you get started.
Myth 4: You need to build a home upcountry
Kenyans are particularly fond of building in their rural area. Building a house ‘at home’ comes with the satisfaction of fulfilling a life goal. But it is more of an emotional choice than a rational one. Will you actually live there? Have you built a house in which you actually spend time? Will you break the bank to build his house? Are you at the start of your career or nearing retirement? Are you doing it to honour traditions? Asking yourself these questions will help you discern whether you really need to get a house upcountry.
If you are young, you need the flexibility to chase that dream job or life partner and that may mean moving from place to place. If you only go home during holidays like Christmas, then consider building a small house as opposed to taking a huge mortgage for a large house that will be gathering dust most of the year.
Myth 5: Retirement planning doesn’t need focus until the age of 40
Are you below the age of 30? Have you started saving for retirement? If not, you are ignoring a very important concept called compounding. Let’s see how compound interest works with an example. If a 25-year-old started investing Sh20, 000 per month (assuming there is a 6 per cent return), by the time they turned 65, they’d have a nest egg worth Sh39,370,000. But if they’d waited until 35 to start saving Sh20,000 a month, even with the same rate of return, they’d end up with almost half that — Sh20,110,000 — by age 65.
Wainaina says: “The reason not to wait till you are in your 40s is that in your 40s, your financial responsibilities are at their peak, and you will not have enough time for your investment to grow. In contrast, in 20s, your financial responsibilities are very few, and hence you can invest more.”
No matter how small your income or how distant retirement seems, put away even 5 per cent of your income and enjoy the future financial freedom.