STOP TAKING LOANS FOR LIFESTYLE

Posted by Zack Mwema.

While it's possible to live completely debt-free, it's not necessarily smart. Very few people earn enough money to pay cash for life's most important purchases: a home, a car or University education. The most important consideration when buying on credit or taking out a loan is whether the debt incurred is good debt or bad debt. From a general perspective, I would say that Good Debt is loan incurred in Purchase of Assets while Bad Debt is loan incurred in purchase of Liabilities.

Robert Kiyosaki, the Author of Rich Dad Poor Dad, defines an Asset as anything that puts money into your pockets or anything that increases your Net worth. He also defines a liability as anything that takes money out of your pockets or reduces your net worth.

Good debt is an investment that will grow in value or generate long-term income. Taking out student loans to pay for University education is the perfect example of good debt. First of all, student loans typically have a very low interest rate compared to other types of debt. Secondly, a college education increases your value as an employee and raises your potential future income.

Taking out a loan to buy a home is good debt as well. Home mortgages generally have lower interest rates than other debt, plus that interest is tax deductible. Even though mortgages are long-term loans (over 20 years in many cases), those relatively low monthly payments allow you to keep the rest of your money free for investments and emergencies. The ideal situation would be that your home increases in market value over time, enough to cancel out the interest you've paid over that same period. You can also take a loan to buy plots or land. While the value of land increases over time, the debt reduces making your net worth to grow considerably.

Loans taken for businesses are also good loans. But one has to make sure that the loan is taken for a business one has already started and understands very well. Taking a loan for a business start up is risky and may leave one’s finances badly exposed.  A new business has its own challenges and so adding to it the extra responsibility of servicing a loan is likely to strangle it to death. It would be advisable to start a business from ones savings or from grants and then take up loans for expansion once the business has stabilized.

Bad debt is debt incurred to purchase things that quickly lose their value and do not generate long-term income. Bad debt is also debt that carries a high interest rate, like credit card debt. The general rule to avoid bad debt is: If you can't afford it and you don't need it, don't buy it. If you buy a fancy,  Kshs 5,000 pair of shoes on your credit card, but can't pay the balance on your card for years, those shoes will eventually cost you over Kshs 8,000 and by then they'll be out of style.

Temporary  Overdrafts or Salary  advance loans are some of the worst kinds of debt. In overdrafts and salary advances, one takes a loan that they pay once their salary for the following month hits their bank accounts. Interest rates for this kind of loans are astronomical, starting at 10% per Month which loosely translates to 120 % annually and if you fail to pay back the amount by your next payday, you incur yet another processing fee to "roll over" the loan. Worse still, if one is not careful, once the loan is deducted, he/she will apply for another advance hence starting a debt cycle that’s not easy to get yourself out of.

The worst loans are loans obtained from loan sharks or Shylocks. In a recent seminar I held, a client told me that he had a problem and approached a Shylock for solutions. He wanted Kshs 20,000, the Shylock told him that he had to pay Kshs 8,000 in advance as interest, this he did and was advanced a loan of Kshs 20,000 to pay the following month. Come end month, he paid back the Kshs 20,000. Failure to pay the money, he would have paid Ksh 36,000 the following month.  So in Total, he paid Kshs 28,000. Simple Mathematics will tell you that translates to 480 % Per Annum.  This is a classic example of Bad debt. Now compare this with another guy, in the same seminar who told me that he took a loan of Ksh 200,000 to buy a plot in an upcoming estate in his local town. He pledged to pay back the loan over a period of three years. By the time he finished repaying his loan, the value of the property had risen four fold to Kshs 800,000.

So before you sign up for that loan, or before you call your friend to ask him / her to Mpesa you some money refundable on end month, ask yourself, do I really need this loan? , is it increasing my net worth or decreasing my net worth? Is it good or bad debt? Though its difficult to live completely debt free, its very possible to live free from stressing and straining bad debts.

Please click this like my Facebook page, Stars of the Future, so that we can talk  more about money.

THE FIVE LAWS OF MONEY FROM THE RICHEST MAN IN BABYLON

The Richest Man in Babylon is a book that was written in 1920’s, the author, George  S. Clason was a very wise man. Surprisingly, the lessons of over 100 years ago are very much true in our present lives. Technology might have changed over the years; our lifestyles might have changed, but the laws of proper money management are still the same. Yes, the law of gravity has not changed over the years, why should the laws concerning money change? The author of the book says that if many people were asked what they will choose between a bag of  gold (money ) and a tablet containing laws concerning money management, many will choose the latter. Yet he compares this to a pack of wolves who are hungry and when you throw meat to them, all they do is fight and eat the whole of it. Come the following day, they are still hungry….just take your few minutes to read through these five laws of money management.

THE FIRST LAW OF GOLD

Gold cometh gladly and in increasing quantity to any man who will put by not less

than one-tenth of his earnings to create an estate for his future and that of his family.

"Any man who will put by one-tenth of his earnings consistently and invest it wisely will surely create

a valuable estate that will provide an income for him in the future and further guarantee safety for his

Family in case the Gods call him to the world of darkness. This law always sayeth that gold cometh

gladly to such a man. I can truly certify this in my own life. The more gold I accumulate, the more

readily it comes to me and in increased quantities.

The gold which I save earns more, even as yours will, and its earnings earn more, and this is the working

out of the first law."

THE SECOND LAW OF GOLD

Gold laboureth diligently and contentedly for the wise owner who finds for it profitable

employment, multiplying even as the flocks of the field.

"Gold, indeed, is a willing worker. It is ever eager to multiply when opportunity presents itself. To

every man who hath a store of gold set by, opportunity comes for its most profitable use. As the years

pass, it multiplies itself in surprising fashion."

THE THIRD LAW OF GOLD

Gold clingeth to the protection of the cautious owner who invests it under the advice

of men wise in its handling.

"Gold, indeed, clingeth to the cautious owner, even as it flees the careless owner. The man who seeks the

advice of men wise in handling gold soon learneth not to jeopardize his treasure, but to preserve in safety and to enjoy in contentment its consistent increase."

THE FOURTH LAW OF GOLD

Gold slippeth away front the man who invests it in businesses or purposes with

which he is not familiar or which are not approved by those skilled in its keep.

"To the man who hath gold, yet is not skilled in its handling, many uses for it appear most profitable. Too

often these are fraught with danger of loss, and if properly analyzed by wise men, show small possibility of profit. Therefore, the inexperienced owner of gold who trusts to his own judgment and invests it in businesses or purposes with which he is not familiar, too often finds his judgment imperfect, and pays with his treasure for his inexperience. Wise, indeed, is he who investeth his treasures under the advice of men skilled in the ways of gold."

THE FIFTH LAW OF GOLD

Gold flees the man who would force it to impossible earnings\or who followeth the

alluring advice of tricksters and schemers or who trusts it to his own inexperience

and romantic desires in investment.

"Fanciful propositions that thrill like adventure tales always come to the new owner of gold. These

appear to endow his treasure with magic powers that will enable it to make impossible earnings. Yet heed ye the wise men for verily they know the risks that lurk behind every plan to make great wealth suddenly.

"Forget not the rich men of Nineveh who would take no chance of losing their principal or tying it up

in unprofitable investments.

There you have it. Do something about it. Remember, knowledge is not power, its potential power. It only becomes power when it’s actualized and brought into action..

Changing from being an Employee to being an Employer

Are you ready to change?

 Story By WACEKE NDUATI OMANGA
 Saturday NATION

Today I want to address you, that person who is employed and is thinking about going into business, and you, that person who may have just left employment to start a business.

Many people want to go into business. They have certain beliefs, and delusions, about running a successful business. Many want to escape the “restrictions” that employment supposedly imposes, such as the freedom to spend time as they wish and the ability to earn millions in a month.

I want to share with you what I have learned along the way while running my own business in the hope that you will avoid some of the expensive mistakes that many have made.

• 1 The networks you had while in employment are not necessarily going to carry forward into your business. When I left employment, I was working for a prestigious bank.

I assumed that the clients I had then would cross over with me into my small business. They did not. The clients associated with the brand that was behind me, i.e. the bank. When I left the brand, they could not be bothered. I have met many people about to make this mistake. Do not assume that because you are good at your current job, clients will jump into your boat.

You have to be prepared to build a new network and to prove yourself all over again under a new name. Even your close family and friends may very well not become your clients, so do not depend on that. Maybe before you hand in your resignation, see if your proposition is strong enough to attract one or two independent clients who are not associating with you because of the company you work for.

• 2 You will be kicked out of your comfort zone. The lifestyle you had when employed will not be sustainable when in business.

Be ready to not be able to hang out with your friends that much. You will be tempted to show everyone that you are doing well by continuing to live the way you did before. Many times people spend money to accommodate the image and comforts they had while employed. They get an office in the right location with a receptionist and messenger and establish an entertainment budget even before the first client walks in.

They then kid themselves that the money will come. Six months later when reality hits, they have to let go of the support staff they surrounded themselves with. When you are starting out, focus only on the necessary things needed to run the business. Let all other things be dictated by the actual growth of the business.

You may not even need an office to begin with. Be prepared to be the messenger, filing clerk, and sales and marketing executive all at once. You will not have that free time you dreamed about. A day will come when you have Sh200 in your bank account and still have to keep moving.

This process is about character building and if you are not ready for your character to be challenged, reshaped, and transformed through trials, then business is not for you. The character that is created as you are shoved out of your comfort zone is what is needed to support the growth of your organisation as you build it.

Do not look at a person who has been in business for some time and start comparing yourself or live the life they are living. They have walked a journey of 1,000 miles to get there.

• 3 You will fail if it is only about the money. Two people can start a butchery in the same location. One thrives, the other does not. Why? Because of the motive behind the business.

One is in it for money and the other because he actually likes what he does and enjoys serving people. He will naturally spend more time learning about it and put up proper structures to make the business more efficient. Being passionate and purposeful about what you are doing gives you the “staying power” required to get through the hard times.

Entrepreneurship, at the end of the day, is a fantastic journey; you only learn once you are in it. There is no guarantee that can be provided to you from the sidelines. Commit to the learning process, aware that not everything you plan may come to pass.

The biggest question I think people need to ask is, “Am I ready to change?”

Demystifying Bangla Pesa

The concept is not new and was first introduced in Kisumu Ndogo, Shauri Yako and Mnazi Mmoja slums in Kongowea Last week, Bangladesh slum in Changamwe, Mombasa, was in the news with reports that it had introduced its own currency - Bangla-pesa - to act as a substitute to the Kenyan money.
The founders and members of the initiative found themselves in court for allegedly using illegal currency to transact business. CID officers from Changamwe police station with 'orders from above' arrested five women and quickly arraigned them in court without charges being preferred against them. Kenyan police had panicked and read mischief in the publication of currencies meant to rival the Kenyan shilling, mainly propelled by the existence of secessionist groups within the area where the new 'currency' is operational..
"The story that first appeared on a local daily instigated the arrests of the innovative citizens through misreporting," said William Ruddick, the founder of the initiative. Ruddick said the organisation had no intention of creating official money and that the Bangla-Pesa was clearly labelled as a voucher. The organisation, Koru, is a registered community-based group in Changamwe. The aim of the initiative is to support the locals to trade and save more money for developments. “Bangla-Pesa is a programme to strengthen and stabilise the economy of the informal settlement of Bangladesh by organising its more than 200 small scale businesses into a Bangla Business Network, through which its members can utilise a complimentary currency to mediate trades,” reads part of the introduction statement on Koru's website. Ruddick, the co-founder of the project, says their objective is to help the members trade their excess capacity among themselves.
“We have seen trade increasing by more than 20 per cent and we are not replacing the Kenyan shilling.” Ruddick is an American who has been working with the slum dwellers in different development projects. According to the organisation's website, credits are issued in the form of paper-vouchers that can pass from hand to hand as payment for goods and services. Toward the end of 2013, they hope to add the capability of using mobile phone technology as a means of transferring Bangla credits. “Ours is a noble cause of helping the locals and not what was reported in the media last week,” he says. “We are not MRC and we do not support any cause of going against the government's wish. This is a business to business voucher system and simply helps business record their exchange of excess capacity,” Ruddick says. “It is credit within this mutual-credit-clearing (or multilateral reciprocal exchange) system which provides a means of payment that is complementary to official money,” he adds.
The Banga-Pesa voucher are only allowed to circulate within the registered members who use it as a credit system plan and are expected to repay it after getting Kenyan money later. According to Ruddick, the concept is not new and was first introduced in Kisumu Ndogo, Shauri Yako and Mnazi Mmoja slums in Kongowea.
Rose Oloo, a member of the organisation who is also out on bond, says they just use the voucher as a means of getting products from the members of the Bangla-Pesa Network and not just anybody else. Oloo was at first afraid to share any details, saying it was the cause of all their problems with the government. When she opened up she said, “You only buy products using the voucher when you have no money but strictly from the registered members; it is a form of buying things on credit,” she says. John Paul Obonyo, a resident, said negative media reports had caused panic among the villagers after they were likened to the banned Mombasa Republican Council secessionist group. The story has drawn a lot of reaction from across the county with other people making fun of the concept.
Jomvu MP Badi Twalib over the weekend defended his constituents against the government harassment following the arrest of six people involved in the saga. While addressing residents during the Madaraka Day celebrations, Badi said Bangla-Pesa was a self help group initiative and was not trying to substitute the Kenyan currency. “The Bangla-Pesa works as a voucher that the residents and business will use as a way of supporting local business and entrepreneurs.
The government should support the initiative instead of arrresting people,” he said. Josephat Kioko, a radio journalist in Mombasa who was shortlisted for an international award after enlightening the Eco-Pesa, the predecessor of Bangla-Pesa in Kongowea in 2010, expressed dismay following the misreporting of the story. Kioko came second runners up in Diageo Africa Business Reporting Awards 2012 in London last year with the story 'Eco-Pesa voucher'. In his official twitter account, Kioko posted: “Police should understand this and not wait for misinformation from media, then go on and arrest poor Kenyans struggling with little economy.”
Jimnah Mbaru, an international renowned investment banker who has made a remarkable contribution to the development of capital markets in Africa, supports the idea of complimentary currencies. Mbaru, who served as chairman of the Nairobi Stock Exchange for 10 years and Africa Stock Exchanges Association, said Bangla-Pesa was misunderstood. In his official twitter handle he says: “Bangla-Pesa is just a promissory note liquiditable at a later date.
It is discountable in the secondary market. It is NOT illegal.” “Innovation can come (from a) very unusual source. It is the mother of necessity. M-Pesa came through this route. Who knows Bangla Pesa,” Mbaru added on response to Kioko's tweet. Ruddick came out to defend the idea, saying “(Bangla-Pesa) complements rather than replaces the shilling. Have some more fact in choosing your headlines. Sensationalism has caused a lot of harm here.” Complementary currencies might sound new to Kenya, but many countries in the world have this system running and has given people a chance to exchange goods and services without use of money.
These systems may stimulate economic as well as social activities in the local community, and encourage mutual help between its members, consequently reveal and release idle resources unavailable to the prevailing economic system. This may benefit the local community, its members, and society at large. Complementary currencies may help involve people in solving their own problems rather than living on social benefits.
In the United Kingdom and the USA, authorities support the spread of such social networks, as numerous examples show that complementary currency systems leads to stronger community spirit, increase community participation, create better quality of life, and give elderly people a longer and more eventful life with less illness. Alternative currencies, in theory, encourage consumers to make purchases within their communities rather than elsewhere in the country or abroad. "Buying local" circulates wealth in the region, reduces unnecessary imports, and helps avoid higher unemployment levels, supporters say.
At least 4,000 complementary currencies are now estimated to be in circulation worldwide, compared with fewer than 100 in 1990, according to one report drawn from the Internet. On June 19-23, academics, government officials and practitioners drawn from all parts of the world will congregate in the Hague, the Netherlands, with the sole reason of debating the complementary currency systems. According to the organisers of the event, participants will discuss, among other issues, the innovative mobile phone payment systems in Kenya including the award winning M-Pesa and a similar phone payment system in Uganda.
Also to be discussed would be various community and complementary currencies from various regions of the world including LETS, Time Banks, the Argentine Redes de Trueque and the Ithaca Hours in the USA. Others include the German Regiogeld, the Brazilian community banks with surrogate currencies, the SOL currency in France and the ‘Transition Towns’ in the UK. In Belgium there's RES and the Wir in Switzerland,.
The Hague event, according to the organisers, aims at stimulating the exchange of ideas and experiences among the proponents of complementary currencies and its opponents. This clearly indicates the huge impact and the strong belief in complementary currencies all over the world. Kenyans seems to be joining this league. However, the big questions lingering in banking practitioners and Kenyans alike are: What does this mean for the Kenya Revenue Authority collections? Will the alternative currencies reduce the collections? The taxman maybe a worried man, but for Bangladesh residents, the voucher system is uplifting them from their poverty.
How the Lewes pound in the UK works
The Lewes Pound is a local currency in use in Lewes Town, East Sussex, in the United Kingdom. The currency was introduced in September 2008 by a NGO movement called Transition Towns as a mechanism to cushion the residents from the effects of climate change, economic inflation and rising oil prices.
It is legal as a voucher but not as a currency and the notes are valid for use for five years after which they can be exchanged for new Lewes notes or redeemed for Sterling pound notes.
It is essentially a voucher system traded locally as a complementary currency used alongside the sterling pounds. One can buy the vouchers at designated Lewes Pound outlets and spend it in stores that display the Lewes pound to buy goods and services.
By January 2009, the shops using the currency had risen from 70 when it was first introduced in 2008 to 130. Businesses that accept the Lewes Pound include grocery stores, restaurants, hairdressers, jewellers, pubs, yoga clubs and schools. Moreover, store owners can use the Lewes Pound to pay their employees and local suppliers if they accept it. In this case, it is treated as a taxable benefit.
However, It is not a legal tender and does not intend to replace the Sterling Pound thus there is no obligation by the residents to accept it and it is only accepted in participating outlets. The Lewes Pound is only spent within the locality and it is aimed at benefiting the local economy by encouraging demand for local goods and services. It can be exchanged for Sterling Pounds and they have the same book value. For every Lewes Pound issued, five pence is pledged to the Live Lewes Fund which is a kitty used in funding local projects that are not affiliated with the Lewes Pound initiative.
The Sterling Pounds exchanged for the Lewes Pound are kept in a safe deposit box in a local bank in case people want to trade in their Lewes Pounds.
Although it supports local trading and encourages economic growth within the town, it tends to lose momentum in circulation because for every Sterling Pound that leaves the market, it is replaced by a Lewes Pound therefore there is no real growth of the Lewes Pound if there is no demand for it. The currency will only grow if soft loans or interest free loans are offered on them which are not yet available since it is not a legal tender.

For safety measures, the Lewes Pound notes are printed on high security paper with watermarks, serial numbers and other hidden features to avoid duplication and production of fake notes. The work done in circulating and manufacturing the currency is all voluntary.

Believe in yourself and watch your worthy venture blossom

 Story by Patrick Wameyo, Daily Nation Columnist.

A successful business is nothing more than a vision which has persevered tribulations and obstacles. The founder of the business undoubtedly started off with a vision and a long-term commitment to do something big not just for themselves, but also to serve a large part of the society.

Mr James Oleson, president of the Napoleon Hill Foundation, premeditates this reality.He once said that “people doubt their beliefs, but believe their doubts. Believe in yourself and the world will believe in you.”What happens to you when you believe in yourself, and just why would the world believe in you?

In “Ditch the victim versus victor attitude and carve your own niche,” we highlighted the absence of a long-term commitment to personal vision as one cause of the victim mentality. We said: “When you know you are right, you focus on what you can control rather than the environment around you that you can merely influence.”

People who believe in themselves take action and produce specific tangible results that doubting Thomases can touch and feel to believe you. They produce wealth, not worries.Turning obstacles into opportunities: As Napoleon Hill intimidated in 1931, “There are no limitations to the mind except those we acknowledge (read as we accept as true).”

A key reason most people born without economic means would rather remain poor and take no action to transition is the idea of how things will look like when they fail. This is unlike the wealthy, who instead would look at the same situation from the point of view of how fine life would be when they have succeeded in implementing their wealth idea.

The Bible, Numbers (13:31-33), has a perfect example in Christian life.Both the poor and the wealthy have dominating visions, the poor seeing doom, which results in maintenance of the status quo, while the other sees glory waiting and motivation to follow God’s will.

These people may live in the same neighborhood and probably went through the same schools, but will gradually go into separate worlds patronized by different people around them, each attracting like poles.One group overcomes obstacles, doing great things and wielding power around the world. The other group — victims — wonders what happened and looks helplessly for assistance.

— Patrick Wameyo is a financial literacy educator and coach. Email: coach@financialacademy.co.ke