Wealth Maximization: Managing the Key Drivers of Your Personal Finances – A Practical Example (Part 1)

To further demonstrate our understanding of this subject, let’s consider a hypothetical situation of a typical Kenyan gentleman’s life goals and financial situation.

Meet Kinuthia, a 24-year-old employed Kenyan male who earns a decent salary and has ambitious financial goals. Like many of us, Kinuthia wants to make the most of his finances and maximize his wealth. In this blog post, we’ll explore several key strategies that Kinuthia can employ to achieve his goals and secure a comfortable future for himself and his family.

Kinuthia’s short term and long term goals:

1. Own a German luxury car worth Kes. 3,000,000 by the time he’s 30 years old.
2. Own a 3 or 4 bedroomed apartment worth Kes. 10,000,000 by the time he’s 26 years old.
3. Build rental houses/apartments worth Kes. 60,000,000 by the time he’s 45 years old.
4. Pay bride price and marry a wife when he is 30 years old, have two children.
5. Send his two children to prestigious local schools (Cambridge Curriculum) and then to University of Cambridge in the UK.
6. Support his retired parents who live in the countryside.
7. Take his nuclear family on overseas trips for holidays every 3 years.
8. Save enough to live comfortably in retirement.

Kinuthia’s financial situation:

1. Monthly gross salary of Kes. 150,000 with annual salary increment of 10% and job promotions to higher level or rank with a 30% increase for each promotion every 5 or 6 years.
2. He enjoys comprehensive medical insurance as a benefit from his employer. All medical expenses for him and his family are paid for by insurance.
3. The retirement age in Kenya is set at 60 years. 20% of his monthly gross salary goes into a registered pension scheme earning average interest of about 10% per annum, and the employer contributes a similar amount every month.
4. Has access to an interest-earning call deposit at Branch Microfinance Ltd, which can earn him up to 15% p.a. paid out to his savings account weekly.
5. He also has an overdraft facility with his main bank of up to Kes. 2,000,000 which he can access at any time, charged at a rate of 10% per annum on the outstanding balance.
6. To purchase his first house (for own use) and build his apartment block (as an investment), he will utilise 15 year mortgage facilities from his bank which have an interest of 12% per annum.
7. The cost of his monthly living expenses without a family is Kes. 25,000, and with a wife and children, the monthly living expenses are Kes. 50,000.
8. He will pay Kes. 35,000 per month for a 1 bedroomed apartment before buying and moving into his own house.
9. The cost of maintenance for his car once he buys it will be Kes. 300,000 per annum, and the fuel efficiency is about 10 kilometers per liter.
10. He will pay Kes. 500,000 to the bride’s parents as dowry and then pay Kes. 100,000 every two years until the total amount of bride price paid becomes Kes. 1,200,000.
11. The cost of each overseas holiday trip with his nuclear family is about Kes. 300,000.
12. The school fees for each child is Kes. 200,000 per annum for a total schooling period of 16 years, and this figure will increase by 30% every 5 years.
13. The expected cost of sending each child to university in the UK is Kes. 3,000,000.

Now, let’s attempt to simulate how Kinuthia will financially perform in the first 5 years of his life and career journey.

Kinuthia’s Income and Expenses

Kinuthia’s primary source of income is his gross salary, which averages KES 2,810,423 per year over a 5-year period. He also receives interest income from Branch International and his pension, averaging KES 10,418 and KES 271,250 per year, respectively. Over these five years, Kinuthia’s cumulative income amounts to KES 11,947,428.

Kinuthia’s expenses include living expenses, rent, and support for his parents. Additionally, he incurs interest expenses on his bank overdraft and mortgage for a 3-bedroom apartment. On average, Kinuthia spends KES 1,105,215 per year, with his cumulative expenses representing 46.3% of his cumulative income.

Kinuthia’s Statement of Financial Position

Kinuthia’s assets include cash in his Standard Chartered Bank account, a 3-bedroom apartment, a call deposit with Branch International, and contributions to his pension (both employee and employer portions). By 2027, his total assets amount to KES 16,040,291. It’s important to note that his savings make up 50.6% of his cumulative income, indicating a strong commitment to saving for the future.

Kinuthia’s main liabilities are his home loan (mortgage) and a bank overdraft. By the end of 2027, his outstanding mortgage balance is KES 7,545,061, while his overdraft balance reaches KES 2,073,877. It’s crucial for Kinuthia to manage these liabilities effectively to reduce interest expenses and improve his financial stability.

Kinuthia’s net worth (retained earnings) represents his total assets minus total liabilities. By 2027, his net worth grows to KES 6,421,353. Tracking net worth over time is an excellent way to measure financial progress and ensure that overall wealth is increasing.

Kinuthia’s Cash Flows

Kinuthia’s primary source of cash inflow is his net income, which includes his salary and other sources of income such as interest received. Over the five years, his total net income amounts to KES 6,421,353, with an average of KES 1,284,271 per year.

Kinuthia’s cash outflows are mainly composed of fixed assets (a 3-bedroom apartment purchase), investments (pension and call deposit contributions), and loan repayments (mortgage and overdraft).

By subtracting cash outflows from cash inflows, we can determine Kinuthia’s net cash flow. Over the five years, his total net cash flow is KES -2,073,877, with an average of KES -414,775 per year. It’s important to note that his net cash flow as a percentage of income ranges from 1.2% to -65.0%, indicating that he may need to review his financial strategy to improve his cash flow position.

Conclusion

Looking at Kinuthia’s financial situation and achievement of goals over the first five years, would it be advisable for him to focus on driving down his debt and build a strong financial foundation before pursuing his other goals?

Should he re-evaluate his goals and timelines? For example, could he postpone purchasing a luxury car, getting married or delay building rental houses/apartments until his financial position is more stable?

Should he focus on reducing debt? To improve his cash flow and reduce interest expenses? So that he can build some equity on his property, which can serve as an asset for future investments?

Let me know what you think as we continue to help Kinuthia navigate the ups and downs of his career and financial journey.