When moving forward takes you backward

Imagine walking 10 steps forward only to realise you have actually taken 15 steps backwards. Unfortunately many of us are doing exactly that with money and other aspects of life that directly or indirectly impact our relationship with money. It may look like we have made some progress but we have actually digressed.

It’s like entering a bus to travel to Mombasa only to realise that the bus you took went in the wrong direction and took you farther away from Mombasa. Here are some of the ways we go backwards but continue believing we went forward.

Pay rise

You earn a bigger salary than you were earning three years ago. A bigger income is always great. However, your expenses have ballooned in proportion to your higher income. So say you were saving 20 per cent of your income on a smaller salary before, now you are saving five per cent or nothing at all or even worse, spending more than you earn.

What nobody may have told you is that your size of income or where you spend it has absolutely no reflection on how wealthy you are. It is the size of your bank account and assets that matters.

It is all good to move to a more expensive house, buy a nicer car, drink more expensive drinks, buy better shoes, etc, when you get a pay raise, but you need to understand that these things don’t take you forward. Be aware of the finer things in life that your higher income can afford you, but better still, be aware that you now have more money to invest and choose where to put that raise wisely; either in depreciating flossets or in assets.

Buying a home

Almost everyone dreams of buying their own home. So say you finally achieved this goal and moved in to your own house, so you are no longer renting. Everybody around you congratulated you on this achievement. You were told a home gives you financial security. You subscribed to the notion that your home should be your biggest asset or your biggest investment. 

Sorry, it doesn’t work that way. You would be richer if that same money was in the bank earning interest. It ceased being an investment the minute you bought a house to move into. A house is a personal belonging, not an investment. By buying a house for yourself, you moved backwards financially. If you are paying a mortgage, that took you even more steps back because you now have a liability.

If you lose your job, retire or can’t work anymore, your house will not put breakfast on the table. Had you bought a house to sell later for higher price or put a tenant in, you would be financially ahead. Again, I’m not saying a house is bad to have or that you shouldn’t strive to own one; just don’t tick off the “I’m rich” box because you own or have a home. You have to do a lot more than simply own a home to be rich.

Making seemingly good/safe moves with your money

You started a chama (investment group) with some of your friends. You wanted to be the next big thing. You make your monthly contributions diligently. You did not anticipate that because of lack of structures and execution, your money would be sitting in a non-interest earning account three years later. Or you took out a policy for your child’s education.

Ten years later you realise it can’t quite cater for the fees you anticipated.  Or you were simply averse to risk so you played safe and just invested in safe things.  Low returns, but safe. ‘Better safe than sorry’ you told yourself. You lent Sh100, 000 to a friend and they paid you back the Sh100, 000 a year later. All these examples are about how misunderstanding the time value of money can take you backwards.

Three years from now, a shilling will not be able to buy what a shilling can buy today. There is an opportunity cost to the money you kept in the chama.  Could you have done better in a different investment? This cost also applies to lending money to people. A year later you will not be able to buy with Sh100, 000 what you can now.

You forgot to plan for your child’s education using the amount education will cost at that time, not what it costs now. The biggest financial risk is taking no risk at all. Low risk erodes the value of money because costs are rising faster than returns.  If this is your strategy you have to put quite a bit of cash down to keep up. 

Shortcuts

You took a shortcut to Mombasa only to realise that the road is blocked.  Then you have to spend more time going back to the main road to resume the journey. Not all shortcuts get you there faster. You acquire money illegally; it goes out the window just as quickly. Easy come is usually easy go. Alternatively you spend your life looking over your shoulder or controlled by the person who has this secret hanging over you.

Was the money worth your sleep at night? You are now a slave to it. You take out a loan for this investment that is sure to double in year only for you to lose your money and be left servicing a loan.

You thought you were wiser than those who have been investing consistently over time. You start that business purely to make money quickly. You caught the end of a seasoned entrepreneur’s story. The end, which has the money and fancy lifestyle. You missed out on the process they took to get there. You quit your job and went for it. 

Two years later the money has not been made as quickly as you thought and you give up then.

Take a critical look at your financial decisions. Have they really moved you forward or are they taking you backward?