Are you financially literate?

It starts with the first pay cheque; the excitement, the thrill of your first pay is exhilarating and may call for celebration, shopping and spending.

Things that had not caught your attention before prick your interest; that dress, that Android phone, radio system, TV and so on.

After all, you reason, I deserve it, I have worked for it. And since you have loads of money, or so you think, dishing it out is not such a problem.

Trips to the ATM or M-Pesa bank withdrawals become a daily routine such that by the time you realise it, you are already broke with so many days still to end month.

Then begins the borrowing, and within a short time, months on, years on, you find yourself in a debt trap.

Missing link

This scenario is not unique; it has happened to many people in and out of employment, yet it does not have to. So where is the missing link, why do so many people find themselves in endless debt?

Lack of financial literacy, experts say. Most Kenyans do not know how to manage their finances adequately and that is why most business start ups also fail.

Recent statistics show that 51.3 per cent of Kenyans feel out of control of their finances, a majority of who are in rural areas. It also indicates that 41 per cent are using financial instruments to smooth consumption.

The statistics show that 50 per cent of Kenyans save to meet day-to-day needs, rather than long-term needs, while 61 per cent are worried about their financial status in old age.

36 per cent of the population are said to have loans and 28 per cent of total population (46.7 per cent of those with credit cards) take new loans to pay old ones. 25 per cent of customers love to spend even if to use credit.

Statistics further show that 67.3 per cent of the population say they never seek for financial advice, while 46 per cent turn to family and friends for advice.

All these are a pointer to the fact that a sizable number of Kenyans have poor financial skills.

It is said that having money doesn’t make one rich. But having money management skills facilitates the process of wealth creation and gives one financial independence.

However, good money management doesn’t just happen. It takes knowledge, understanding and, most importantly, practice, diligence and one’s financial capability, financial experts say.

People who are financially capable are able to make sound financial decisions for themselves and for their families; make informed choices between different financial products and services; budget and to plan ahead financially; to build up some savings and to avoid becoming over-indebted, a new report, Developing Financial Capability in Kenya, authored by Shaun Mundy, a consultant specialising in financial capability and financial services regulation says.

Mr Mundy defines financial capability or literacy as having the knowledge, understanding, skills, motivation and confidence to make financial decisions, which are appropriate to one’s personal circumstances.

It comprises making ends meet; keeping track of your finances; planning ahead; choosing financial products; and staying informed about financial matters.

Ms Susan Morinte, a business woman in Nairobi, believes that she has what it takes when it comes to financial literacy and she goes on to point out why.

“Being financially capable means knowing how to maintain a simple household budget with a bank account and credit cards. For instance it includes, saving for emergencies, special purchases and retirement,” she says.

“I think financial education is very important. But whether it will work or not depends on an individual. Some people see it as an important step for them to understand how to manage their finances well, while others see it as a waste of time. But I think I understand my finances well,” she says.

As a self-employed woman, Ms Morinte has a plan set out towards her personal financial freedom. “I earn Sh200, 000 per month, for which I have laid down a budget. I spend Sh20,000 for house rent. Sh4,000 weekly to fuel my car (I use the car on my business errands).

I spend about Sh12,000 on food and about Sh8,000 on my mobile phone calls, also to clients. My budget has helped me because I follow it to the last letter.”

She adds that she puts aside Sh50,000 on her savings account every month and Sh20,000 for emergencies. However, unlike Ms Morinte, many people lack the knowledge, skills and confidence to manage their money well as the report indicates.

“In Kenya, for instance, we have had a number of people who, in recent years, have fallen victim to pyramid schemes. Financial capability or literacy allows people to be educated on how to spot a pyramid scheme and the risks involved if they invest in such a scheme,” says Mr Mundy.

Ms Bilha Maina, a financial educator with Financial Sector Deepening Trust Kenya, says FSD Kenya is working with a wide range of partners to build effective ways to improve the nation’s knowledge and understanding of personal finances.

Financial capability

“We have already put in place a national financial capability (or financial literacy) programme, which is being led by the central bank. We have also had several seminars on financial education around the country,” says Ms Maina.

But so what about financial capability? Does it really improve one’s financial position? Mr Manyara Kirago, a personal financial coach and author of “How to Become a Financial Success”, says financial education in the country is important, since majority of people have almost become slaves to their credit cards.

“Financial capability (education) is a very good and cost effective strategy for a consumer to be more money and investment smart. This kind of education develops confidence and the knowledge of one to be in control of their own finances without anybody taking advantage of them,” he says.

The report indicates that a number of employers in Kenya and other African countries have recognised that they too can benefit from increased levels of financial capability among their staff, since employees with money worries can become less productive in work.

“Some employers in Kenya and other nations have facilitated programmes designed to improve the financial capability of their workforce. This improvements in people’s financial literacy can also help organisations to achieve their goals.”

Finacial literay is developed over a lifetime, but it needs to start in school. The reason why most Kenyans are illiterate finacially because finacial literacy is not taught in schools.

Schools need community and government support to encourage development of robust curricula that include math and financial decision strategies.

For adults, attending financial education seminars, reading financial education materials and seeking advice from qualified financial professionals, is a good step in acquiring financial capability.