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Kyama Mugambi, an MBA student, kicked off our 'Taming Your Wallet' Series.  In this follow up to Risks and Obstacles, he discusses the building blocks to achieving financial freedom. He examines the chief principles and shares ways in which to practically apply them.
>> Basics About Personal Finances
I was in conversation the other day about cell phones. It started with a comment about investing in a decent [read expensive] cell phone. There seems to be an unwritten rule that if you spend a lot of money on an item, say a 29” flat screen TV, flashy cell phone, fancy car or so on, then you will be getting good investment value.
In other words, if you save up or get some credit and buy an expensive item, then it is likely to be a good investment, ie an asset worth having. The problem with that kind of thinking is that it comes from an unclear understanding of four crucial financial concepts – Assets, liabilities, income and expenses. Are these really ASSETS?
When mastered practically, these concepts lead to financial freedom. The terms come with some academic accounting baggage and one often gets the feeling that they have to be an economist to figure them out. Here are some thoughts that have helped me apply the concepts in my day to day life, with some success. Some definitions first.
Income: is just that - In Come! It is the amount of money that comes in, usually from some form of regular employment.
Expense: comes from an old Latin word that means to weigh out, especially in monetary payments! How much lighter our lives would be without this burden! Your expenses are those amounts of money that you give to everyone one else [except yourself] to pay for day to day activities of your life.
Assets: are those things that generate money for you. By this definition you car, TV or phone is not an asset unless someone is using it and paying you for it. Good assets include a profitable business, good stocks/shares, and performing real estate.
Liabilities: consume money from their owner. For example, loans, automobiles (yes, cars) and nice looking hire-purchase furniture. Every time a liability dips its hand in your wallet it's likely to add stress and reduce your ability to get more assets.
>> So, here's the deal!
Aim to maximize your income. Maximizing your income is one of the ways to honor the Lord who gives you the ability to produce wealth. [Deut 8:18] You do this by keeping your job and finding assets that will give you an income over and above what you earn. A good share on the stock exchange, an item you rent out for money or a business you own with a partner are good ways to increase your income.
 Try Investing In Shares
Minimize your expenses by cutting down on those things you could or should do without. You can cut down your rent expenses by sharing rent with a roommate in a lower cost area. Save up to buy what you need, and avoid credit in its various forms [credit cards, hire purchase, lipa kidogo leo nitarudia zingine kesho...] More about this in a bit.
The key to financial freedom is investing in assets which will give you an income and support you when you are in between jobs or when you retire later on. The more performing assets you pile up for yourself the better it will be for you. In fact, and very importantly, if income from your assets can cater for all your day to day expenses, then you will begin to experience financial freedom. Maximize your assets. Start a business or look for a rental property that can give you an income. Start small and build up on your asset base.
 In my view, the easiest liability to deal with is credit. That's because taking it up is a matter of your choice. Avoid loans and credit because of two kinds of interest - the interest your money accumulates each month you haven't paid it; and the interests of the lender in getting back their money from you. Most lending institutions are more than happy to give you credit but are less than charitable dealing with you, especially when you default. As the adage goes kukopa harusi kulipa matanga. Let love be the only thing you owe anyone! [Romans 13:8]
On a practical note - Begin by saving anything from 10% of your income. Saving is the God given means for you to secure and enjoy the future He gives you. [see Gen 41:35, Prov 30:25] Use your savings to invest creatively in different kinds of assets.
If you start small and early, then you will get the hang of it sooner in life as you accumulate more assets. There are good chances that you will be financially free by the time you retire. In any case, 30 years of practice in saving and investing should make you somewhat good at it. Right?
Once again, in summary
a. Income – money in
b. Expense – money out
c. Asset – money in
d. Liability – money out
e. Maximize income by getting more assets!
:: Exercise
With these new ways of defining much used terms (income, expense, asset, liability), consider your own situation. Write down a comprehensive list of the things in your life, categorising them as above. It might make for some very interesting reading.
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