Can a salary increment make you poorer?
The Sunday Nation
Nairobi,
14 August 2011
Contrary to popular belief, wealth is not measured in shillings or dollars or any other currency for that matter. Nor is it measured in terms of the property that a person owns.
Wealth is measured in days, weeks, months, or years. That is, in terms of time; not money. Your level of wealth is the duration you can survive without working and without changing your lifestyle.
These thoughts came to mind after reading an email from Rachel Andeso. She wrote: “I earn a gross salary of Sh35,400 and get about Sh30,000 after taxes. Out of this I pay my tithe of Sh3,500 and other bills amounting to at least Sh10,000. I don’t know how I spend the rest of the monies because I end up getting broke before end month and not saving a single cent. Could you kindly teach me how to make proper calculations so that I save a certain percentage and be left with something small for spending?”
Out of the Sh30,000 net pay, Rachel is only able to account for Sh13,500. That leaves a balance of Sh16,500 which she admits she doesn’t know where it goes. Now, if we spread this “missing” amount over the whole month, we find that it comes to Sh550 per day.
Of course there are invisible expenses such as lunch, transport etc. At the end of the month, you have nothing to show for them! Do they amount to Sh550 daily? Only Rachel can answer that for us.
The trick about saving money is to remove it from your salary before you start spending it; for example through a Savings and Credit Cooperative (SACCO), or a bank standing order.
If you set aside 10 per cent of your net income each month, you will you will accumulate an amount equal to one month’s salary after 10 months – you will be one month wealthy.
Let’s work with real numbers. 10 per cent of your Sh30,000 net monthly income is Sh3,000. Thus in ten months you will have Sh30,000. In five years (60 months) you shall have accumulated Sh180,000 which if equivalent to 6 month’s salary at the current level.
But we have made two assumptions: first is that you will not get any salary increment nor promotions during the next five years, and, second, that you will not get any interest on your savings. This is obviously not realistic!
Assuming a modest 15 percent salary increment per year, we find that you are likely to be earning about Sh34,500 (net) per month at this time next year. If that is the case, then you will have to also increase your savings to Sh3,450 monthly – remember that you are working with 10 per cent.
Thus in the first year you will save a total of Sh36,000; then Sh41,400 in the second year; Sh47,610 in the third; Sh54,750 in the fourth; and Sh63,000 in the fifth. This makes a total of about Sh242,760…still assuming that you are not earning any interest.
Using the 15 per cent annual increment, your net income will about Sh52,000 after five years. Therefore, you will be about four and a half months wealthy. Does that mean that a salary increment actually makes you poorer? The answer is a story for another day!
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