Centonomy: Making Smart Sense of your Finances

Some days ago, Waceke Nduati, founder of Centonomy, a personal finance series that helps people get a grip of their finances and deal with money problems (that are often self-inflicted), gave a brief talk ahead of the new Centomy class period.

Centomy's eleven week course has just resumed with classes (total 3 hours a week) repeated on Tuesday,Wednesday,Thursday and Saturday from June to August. This is useful as some people may be busy on some days in a week, but can catch a repeat  on any of the other days, and they are both in Westlands and downtown Nairobi.  

These include sessions on personal money management (setting goals, monitoring plans), living abundantly, investment planning (choosing an advisor,  stock exchanges, valuing private companies), psychology of spending, money & relationships, time value of money, good vs. bad debt, managing cash reserves and irregular incomes, property investing, taxes, and estate planning (wills, family companies, succession).

Some tips she cited: 

• If you want to grow wealth, don’t hang with people who just sit around and complain about things like government. Instead read, learn, and be with uplifting voices.
• Use your free time. Do free lance stuff like writing on Saturday morning or drive around to check up on opportunities. e.g new houses
• If you buy a Range Rover for attention, you may be doing it at the wrong time in your life. Also you'll have to keep upgrading that car to keep impressing the same people.
• The skills you have are assets; improve them, instead of buying the latest phone (the world will never run out of things to spend money on)
• Realise that half your income in a year goes to taxes and rent. Also we earn money 5 days a week but spend 7 days a week.
• When you retire, whatever your built will have to go back to paying your lifestyle
• Hidden savings - cutting back on your Kshs 300 per day lunch may equal Kshs 108,000 in December - enough for a land down payment, school fees or a (well deserved) holiday. 
• It's  a myth that you can only save/invest when you earn a lot. Start with whatever you have, and saving Kshs 200 a day at 10 % can be Kshs 1.2 million in 10 years.

Investors Vs. Spenders

A guest post by Wanjiru Kamau of Capital Registrars

As I read and write about personal finance, I try to establish or cultivate an investor habit rather than the spender habit with people. Where do you fall?

First, you should understand the difference between an assets vs. flossets!. An asset creates value, while flossets makes you look like you have money! You know them – they include the latest car/TV set/clothes/expensive phones etc. Like a job interviewee with impeccable dressing and good English (well don’t hire those!), a flosser looks like he/she has money and are attractive to many!

Now, in understanding the difference between an investor and a Spender..

1. Interest: An investor earns interest. A spender pays interest. The Central Bank issues Treasury Bonds and Treasury Bills every so often. You can check their website on the Central Bank of Kenya. While investing in these are for big players with millions to spare and an eye for after tax interest , they are now available for investors with as little as Kshs. 50,000 (~$500)

However, fund managers such as Zimele, and a number of collective investment schemes licensed by the CMA pool funds from many small players and credit interest on accounts every quarter. The spender on the other hand funds his many expenses with loans, and is always paying out interest.

2. Capital Gains vs. Losses: The main aim of an investor is to make money not lose it – and he/she earns capital gains on investments like stocks, land, businesses and other investments. However, a spender quickly loses his capital every day on his flossets e.g. a car’s value, which goes down the minute it leaves the showroom.

3. Type of Phone calls: The investor receives phone calls from people who want to create more value or deals that he may make money in; while the spender receives phone calls from shops or friends that want to sell him/her the latest clothes, phones and other gadgets. While these items are not important, changing your phone every time there is a new model, is not financially healthy unless you your balance sheet allows it.

4. A Savings Culture: The investor saves money to build an emergency fund or capital for business. He knows that little by little, with a discipline, he can build a fund that is large enough to sustain him in case of income loss. In contrast, the spender hardly saves. He always has too little money to save even if he has a good income, as he is always servicing high interest loans or paying for more Flossets that his salesmen friends arranged for him.

5. Insurance policies: A smart investor maintains important insurance policies to avoid losing assets in a fire or to thieves. They have taken the time to understand, the somewhat difficult insurance jargon and marketing practices to subscribe to policies that provide some protection to their businesses and families in the event of some losses. A reckless spender may engage in unwise decision like driving a new car for a night out before arranging insurance.

Where do you fall in the Investor vs. Spender divide?

5 ways to protect your NSE shares from irregular sales

We all hope the days of collapsing stockbrokers at the Nairobi Stock Exchange (NSE) are now a thing at the past. However new share offering such as Britak, Family Bank and Bank of Kigali, and other personal finance initiatives such as the I’m a Cooperator movement are likely to convert some people into first time share buyers. So how does one ensure that their funds are not misused by an errant stockbroker or their employees? Read on

A guest post by Shiroh
While it takes a lot of sweat to save for investments, many investors have found themselves in a tricky situation when unscrupulous dealers engage in irregular sale of their shares. While this practice cannot be tolerated for all involved, it is important that one takes proactive steps to avoid losing your investments. These can include;

1. Subscribing to the Central Depository System Alert Service: The mobile phone has truly revolutionized many industries in Kenya. For a nominal amount of Kshs. 10, one can receive alerts to their mobile phone anytime a transaction is made from their CDSC account. For more details, check the CDSC Kenya website.

2. Freezing activity on CDS Account: Since getting mobile phone may not be possible for people residing abroad, freezing any activity on a CDSC account can be done. These instructions are communicated to the CDSC and activity can only resume at the request of the account holder.

3. Constantly monitoring your activity of your account at your preferred Stockbroker. Many people don’t bother to check the activity of their accounts once they make the investments only to get a shock of their lives when they want to liquidate them. A broker is under obligation to provide investors with a statement of account through which they can monitor the movement of their investments.

4. Developing a personal relationship with a dealer or broker. While some personal relationships work to the detriment of the investor, sometimes having a specific person who can address any enquiries that you have can be a great plus.

5. Finally, you should report any fraudulent sale of shares to the Complaint Handling Unit of the NSE.

Is Wealth a Disadvantage to Health?

A guest post by Joshua Arimi of Arimi Foods

It is now widely accepted that there are ‘diseases for the rich’ or ‘western diseases’ and ‘diseases for the poor.’ A World health organization’s (WHO) 2011 report published in June 2011 which analysed the top ten killers in the world showed that, the rich are most likely to die from strokes and heart related diseases, while the poor are likely to die from pneumonia and diarrhoea.

Also in June, Kenya’s Daily Nation newspaper published an article derived from the WHO data with a catchy title ‘The rich more likely to die from heart disease’. Does it mean wealth is a disadvantage to health? No! - The ‘real wealthy’ are not the victims of heart diseases but the ‘average rich’.

When health and wealth are put in the same sentence, it is very important to differentiate between those that are in high income, middle income and low income categories. According to WHO report, highest number of those that die from ‘western diseases’ are from medium income countries as opposed to high income countries. This is contrary to the notion that wealth per se is the risk factor for heart diseases.

Out of 1,000 deaths related to strokes and heart related diseases;

• 39 were from high income countries like United Arab Emirates, United Kingdom and United States of America.
• 179 were from middle income countries such as South Africa, Nigeria, Thailand and Tunisia. i.e the number of people from middle class category that will die from ‘western diseases’ is three times higher than that from high income category.
• ‘Kenya together with Zambia, Zimbabwe and Tanzania are on the low income category and the majority will die from pneumonia and diarrhoea’ says the report. Ideally, a high number of the so called ‘the rich’ in the low income countries fall in the middle class category globally. This may explain why the rich among the low income countries have the highest prevalence of ‘western diseases’.

The WHO also found that while the USA is in the high income category, the majority of Americans who succumb to strokes and heart related diseases are the less wealthy. Other University research in the US found that when they compared wealth and prevalence of obesity, hypertension and related diseases, there was an inverse relationship between wealth and these diseases - meaning that less wealthy were more likely to suffer from them than the wealthy.

To understand why the middle income populations are most likely to suffer from stroke and heart related diseases, it is essential to outline the key major and contributing risk factors. Major risk factors are those that have been proven to increase risk of heart disease and these include high blood pressure, high blood cholesterol, diabetes, obesity, overweight, smoking, physical inactivity, heredity and age. Contributing risk factors are those that doctors think can lead to an increased risk of heart disease, but their exact role has not been defined and these include stress and alcohol.

Clearly, the major and contributing factors of heart diseases are results of lifestyles. The poor cannot afford these lifestyles, however, as they say, ‘poverty is not permanent’.

• Low income populations work extra hard to get out of the lower income cadre, while envying lifestyles of the middle income populations.
• As soon as they join the middle income category, they desperately imitate what they perceive as lifestyles of the rich. That is; eating on the go, consume fatty foods, processed foods, ready to eat foods, smoke, have high alcohol consumption, and assume sedentary lifestyles.
• On the other hand, the high income countries have always enjoyed these foods and lifestyles while in the middle income category and they have witnessed first hand the adverse consequences among their populations and peers. The rich countries are cutting on deadly foods such as high saturated fats, processed foods, high alcohol content drinks and sedentary lifestyles. Meanwhile, the emerging economies and the middle class among rich countries are embracing these renegade lifestyles full throttle.

For example, the biggest supermarket in UK and Ireland, Tesco does not stock any solid cooking fat or hydrogenated cooking fats which are associated with high trans and saturated fats. On the other hand, solid cooking fats occupy the biggest shelf space in supermarkets in Kenya. Also beer drinks sold in developing countries have higher alcohol content than their counterparts in developed countries.

‘I have to enjoy life’, ‘I don’t have to live a boring life’, and ‘I have to live like a rich man’. These are common justifications among the middle class when engaging in life shattering lifestyles

It is not true that the rich are most likely to die from heart disease. ‘Out of 13 million people who died from stroke and heart related diseases worldwide in 2008, 1 million were from low income countries, 2 million were from high income countries and 10 million (5X higher) were from middle income countries’ adds the WHO report. And, in the high income countries, it is their low income population that is at the highest risk of heart diseases. In the middle income countries, the majority are at risk. In low income countries, the so called ‘the rich’ are at the highest risk.

Overcoming Risks Posed by Wealth to Health: Many will argue that with wealth you can afford the medication. However, health is not a financial muscle competition and prevention pays dividends than struggling to cure.

Understanding the consequences of different lifestyles brought about by wealth is key to coping well. The majority who move from low to middle income category of wealth are ill-prepared to cope with what wealth throws at them. It is important for governments and other agencies to educate their people on relationship between health and wealth and if possible entrench the course in school curriculum.

Simple lifestyles tips to opt for include cutting salt intake, a adopting regular exercise regime, cutting back on fatty foods (in particular saturated and trans fats), moderating alcohol consumption and balancing between work and social activities.

Cutting the Big Deals

A guest post by Shiroh.

Many people ask me how to make money especially because I work in an institution that helps people make money. I don’t know the answer, as I have little wealth myself, but I can give a few tips that I have learnt from those who do.

1. Read widely: Most people get information when it is no longer useful. Information is power, so the adage goes. Get information when it is hot. Don’t buy a share when the owners have already issued a good dividend - instead monitor the activities of that particular company for a period of time. Read the financial statements and its notes. The likelihood of making money when the dividend is announced is almost zero. Instead, read about the acquisitions/mergers the company is making. For example, what is the impact of Kenya Airways buying new planes? What is the effect of the international debt that Kengen and Safaricom keep taking periodically, on the company’s future profits? In short, do your research, and stay extremely informed.

Also read personal finance books and blogs. If there is one book I thank the heavens for, it is Rich Dad, Poor Dad. This is the book that introduced me to personal finance. These books are available everywhere, and have a look at them as ignorance is not bliss.

2. Have the money ready: If you are like any other Nairobian, you live from one pay slip to another, or you are on the verge of taking a credit card because the money is no longer enough to last a whole month. When deals come, it is your ability to pay for it, mostly in cash that counts. If you’re considering taking a loan, interest rates are quite high, so the returns will be wiped out.

You have put money away so that when an opportunity strikes, you will be in a position to take advantage of it, so Save! Save! Save! . If you cannot save Kshs. 2,000 ($24) per month, then you are unlikely to be able to Kshs. 20,000. Also consider:

- Joining a SACCO (Savings & Credit Society) if you don’t have the discipline to save.
- Have standing orders with your bank that automatically place money in savings accounts (which are not easily accessible).
- Resist the urge to spend on things you don’t immediately need.

3. Diversify your income: There is always something you can do outside of your job that could give you the extra money. You can read more on this here.

4. Use Professional advice: Many people think they can do everything without professional advice. Get a good lawyer, accountant, and financial advisor to before embarking on major steps. Just like you go to a doctor when you are sick, or a lawyer when you are making deals, also visit a financial advisor if you need to know how to invest.

5. Network: The big deals are made in small smoky bars. This means that you need to align yourself with the right people who know where the deals are. If this means joining your local rotary so that you can get the right introductions, do it. If it means doing more social work, do it. In short, the world is unfair to those who don’t know the rules of the game.

Derivatives in East Africa

On Monday May 16, Strathmore University invited Eduardo Schwartz a UCLA Professor and world-renowned lecturer, advisor, expert and author to give a talk on derivatives.

Introducing the talk, Strathmore Director Jim McFie talked of the plan for Strathmore to be at the academic forefront for learning on derivatives in Kenya, which they are doing with the Global Board of Trade (GBOT) – and that for Kenya to compete with Mauritius as a financial centre, derivatives markets will have to be established in Kenya.

McFie also mentioned a tendency for Kenyan parent to push their children into pre-formed careers at an early age, which was wrong, as he noted that Prof. Schwartz trained and started working as an engineer, before he branched into financial markets.

Prof. Schwartz was giving his first talk in Africa on the subject and chose to give a Derivatives 101 talk, even as he knew there were investment bankers, and officials from the Treasury and Nairobi Stock Exchange present. He observed that it would be difficult to set up such markets given the economic challenges here, but that ultimately, development of efficient market necessary for economic development

He noted:
- You can have derivative on any variable that can be measured without discussion between the parties - e.g. rainfall, presidential elections, sports.
- Popularity? Interest rate contracts are the biggest (390 trillion) followed by credit default swaps (which had rapid growth from 2006 ), then foreign exchange contracts, commodities and finally equity-linked contracts, in that order.
- In any Wall Street Journal, you get a quick reading of all the major forwards e.g. quotes for the UK pound - 1, 3, and 6 months forward, and futures prices of metal & petroleum (gold, silver), agriculture (wheat corn orange juice, pork bellies, rice) interest rates.
- Some arguments in favor for hedging: Companies can focus on main business and take steps to minimize market risks such as interest rates, by hedging, which also minimizes the probability for financial distress.
- Arguments against /dangers of hedging? Shareholders are well diversified and can make their own decisions, it may increase risk to hedge when competitors do not (Southwest Air), and it is possible to take large positions with very little money (traders can change from hedgers to speculators)
- You can get more reading of alocal perspective on derivatives here

While he was said he was shocked that there no forward market in foreign exchange, in Kenya, there are forward markets for currencies, and for some commodities like flowers and fuel, which are done in private arrangements with partners, buyers, and customers, but mainly through large banks. They are not exchangeable, and there is no capital markets mechanism now for this.

(via airliners.net)

The most memorable one was Kenya Airways fuel hedging which they have employed for a number of years during rising fuel prices, but which resulted in a loss of Kshs 5.6 billion (~72 million) in 2009 (more)

With time there could be a few more to deal with gaps such as the current situation where farmers are hoarding maize harvests to draw the government out into paying more for the crop.