PERSONAL FINANCE FROM FIRST PRINCIPLES

I got around to thinking the other day how would I give a talk on personal finance and do a good job of it if my talk was restricted to 20 minutes.

After much huffing and puffing I came up with a talk that would pass.

Ladies and Gentlemen your personal financial situation is determined by how you spend your money. There are only two ways to spend money, either you consume it or you invest it. Which of the two you did more of in the past explains why your finances are the way they are today.

"If your spending was biased towards consumption and away from investment, you are barely making ends meet, regardless of your salary. If on the other hand your spending was biased towards investment and away from spending, you probably are better off than the average person around you....

My talk should really end here but let me expound.

If you had sh10,000 on you spending it maybe going and buying two beers or three or one, depending on the bar you patronize, which beers you may very well leave in the bar’s toilet before you leave. Investing the same sh10,000 may look like buying data on your phone – my provider can get you 2.6GB with that, which you proceed to use on improving your knowledge, that may result in higher income in future. I saw a saying the other day, “Income does not far exceed personal development”

If you has sh100,000, spending it may look like you buying data on your phone with sh10,000 wining and dining at a higher end restaurant than you are used to and posting your frolicking on social media for all to see and admire. The sh100,000 could be used to buy a 20-year bond which would give you 15 percent interest a year for 20 years. The difference between the two is that in the first instance everyone in your social media universe will know you had a blast at such and such a restaurant or bar – maybe even envy you and want to be you, while in the second instance no one will know that you are going to earn sh300,000 over and above the sh100,000 you invested – unless you go on social media and announce your bond purchase. You are unlikely to get more likes than there are fingers on your right hand.

If you had sh1,000,000 you could spend it by hiring a four-wheel car for a day, bundling your friends in it and heading out to jinja and have a few drinks by the river Nile – all documented for your social media fans. Or you get those one million shillings and by a bond or a few thousand shares on any number of shares on the Uganda Securities Exchange (USE) and benefit from future dividends and capital gains. Umeme shares for example have doubles in value since last year.

Let’s take it abit further and you have sh10,000,000 you could spend it by getting on a plane, export your frolicking to the beaches of Mombasa or Zanzibar and again document it on social media. Or you could take that same money and buy a 20-year bond and make sh1.5million annually.

It is easy to see why we would rather eat than invest our money.

"Eating our money provides instant gratification and also has the added bonus of making us “look” rich. While investing our money, not only will the benefits come sometime down the road but also chances are people will not know about it and therefore will not know that we are rich....

Eating our money is not unique to Ugandans, it is a human condition, at least for the majority or 99 percent of the population who are struggling financially.

The remaining one percent of the population bias their spending towards investment and when the join the blasters, years or even decades later at the source of the Nile or Zanzibar, the spenders will say they are lucky, which deal did they do to get money to start partying.

Many years ago, in the 1990s an interview with the Financial Times our own Sudir Ruparelia was asked how he has amassed his fortune and he joked that it is an old Indian trick, where you earn 100 shillings invest 90 shillings and 10 shillings. Repeat until rich.

I also saw a quite the other day that goes “Money does not like noise”. I understood this on an intellectual level but came face to face with it during the NSSF release of the mid-term access funds last year. People complained that NSSF was delaying to release their monies but as soon as they were in the bank, it all went silent.

And finally, if there is one other lesson to be learnt from this talk or kept in mind when we decide how to spend our money is that in all we do with our money, the goal should be to get rich not to look rich.

Thank me for your time.