How can you know if you are broke and living beyond your means? It is not as easy as you may think. It is common among many to feel comfortable with their bank account balances at the end of every month. That feeling of subtracting expenses and taxes from income. And still retain some pocket change.
Ever considered what it would be like if that income failed for just one month? If it did and you failed to pay your rent or defaulted you mortgage, or that one compelling expense, then you are BROKE.
There are many high-end executives, top in their careers, smart in their work and earning humongous amounts of money. Yet, so poor in investing their money.
According to recent reports in an American survey, 58% of top NBA players who earn modest salaries got broke at year five after retirement. Right here in Kenya, we have heard of several politicians, once wealthy and powerful, being declared bankrupt.
Smart individuals tend to earn more, but they don’t always save and invest wisely. Economist Jay Zagorsky has demonstrated that people with high IQ scores missed payments and maxed out their credit cards more often than those with slightly above average intelligence.
Therefore, earning big does not guarantee financial stability. If you do not create a protective cushion against financial uncertainty, then you can easily plunge into bankruptcy. Stability goes beyond paying your bills. It is dependent on the wealth you create from your earning. That includes saving for a rainy day by cutting on unnecessary splurges and vacations today.
There are many opportunities out there for securing tomorrow’s needs such as having retirement plans or investing in properties and business without a boatload of debt.
Most of those who earn high salaries, are more affluent, more often caught up in the lifestyle that they have become accustomed to and perhaps they are living beyond what their salaries allow them to do. Their children are in most expensive schools, live-in nannies, luxury vehicles in order to keep up with their peers.
When you earn high salary and you don’t have an emergency fund, you are simply broke.
High salaries means a lot of cashflow is associated with it, but there is risk to that cashflow. Therefore, one must still plan for the unexpected situations. Everyone, regardless of income levels is vulnerable to debt, therefore lack of financial literacy to manage this situation can cause financial risk.
When you earn high salary and you don’t have an emergency fund, you are simply broke. This means that you are not able to come up with money if faced with unexpected expense; unless you sell a property or borrow. You need an emergency fund for the big financial storms such as losing a job, major car repairs this will help you recover financially incase need arises rather than creating a debt.
If you are not saving for your children’s education, that may also make you broke. Our Higher Education Loans Board (HELB) fund has current loan arrears estimated at Ksh12 billion. This shows how expensive education has become and beneficiaries are encumbered with huge debts and no jobs.
Therefore, if part of your income is not being saved for education of your kids, you will get broke. And your children as well before they even start earning.
Another reason is when with that high income you keep servicing debt, especially for consumer goods, which is not a good financial practice. You can never get ahead financially if you are always paying debts. Unfortunately, many people keep borrowing when faced with financial difficulties.
Also by this author: Four easy sources of finances for young people
Our Kenyan school curriculum is broad enough but has failed to train and impart skills necessary to create wealth out of limited income and resources for sustainability. Many of us think training on savings and investment is just for accountants, economists and other financial experts.
Tragedy hits more when we think it should come later in life.
Kennedy O. Alex is at Business Consultant at Premier Business Extensions Consultant and a Certified Public Accountant. Email: [email protected]