Living in a pandemic has somewhat highlighted issues that people knew existed but kept them under wraps for one reason or another like black tax. These include the need to have an emergency fund; a side hustle or multiple sources of income and the state of our health infrastructure just to mention a few. A topic that has lingered on is the issue of ‘black tax.’ This could be because most people saw their income greatly reduced during the pandemic. As a result of the reduced income, every expenditure – including black tax – is accentuated.
The first part of this article that you can read here defined black tax as the extra money that black professionals are expected to give every month to support their less fortunate family members. The article went on to give ways of dealing with black tax. Interactions with people after the article was published revealed that there are three kinds of people:
The beneficiaries of black tax;
The ‘payers’ of black tax; and
Those who have never experienced black tax.
It is likely that young beneficiaries of black tax (those who were educated using black tax, for example), will eventually graduate to ‘payers’ once they start getting an income. The payers on the other hand, hardly get to put away much in anticipation of their retirement – and therefore – later go back to being beneficiaries in their old age. This cycle goes on for generations. Having talked about how to deal with black tax, it is equally important to ensure that future generations do not have to pay it. This is basically having our children graduate to not experiencing (or paying) the tax.
Here are a few ways of making sure future generations do not have to pay the black tax.
Talk About Finances
The first step has to be the uncomfortable conversations around the ‘personal finance’ topic. These conversations have to be with the people you are supporting, to let them know that you will only be able to handle so much because you have to build something for yourself. It is also great to have a discussion with your siblings because their financial decisions could have an effect on you as well. Have them see the importance of also breaking the black tax cycle so that later, they do not become dependent on their children (or you, for that matter). Have a discussion with your spouse on how to teach your children about money and personal finance. Children taught about personal finance from an early age tend to make fewer mistakes than those not taught.
Start investing! The earlier the better. If you have not started, yesterday would have been great, but today works as well. You can find more details on the various vehicles to invest here. The general rule of thumb is to invest at least 10% of your income. Having a diversified portfolio of stocks, bonds and property should shield you from cyclical fluctuations in the market. Over a long period of time, which is the strategy one should have, stocks tend to outperform bonds. The risk element involved, though, should necessitate having other investments to hedge against a decline in share prices. The most important thing is to let compound interest do its thing.
To understand the eighth wonder that is compound interest, I will use the following example. Suppose, one (Jane) starts working at age 25, earning Kshs.30,000 per month. Let’s assume that Jane gets an increment of 4% every year (meaning the salary after one year is Kshs. 31,200, and the following year is Kshs. 32,448 etc). Let us also assume Jane invests 10% of her salary every month and the investment earns an interest of 10% per annum. In 5 years, Jane will be earning Kshs. 35,000 with her investments now worth Kshs. 248,000. In 10 years, her salary will be Kshs. 42,000, with investments now worth Kshs. 703,000. In 20 years, the salary will be Kshs. 63,000 with investments now worth Kshs. 2.8M. At the retirement age of 60, her salary will be Kshs. 113,000 with investments worth over Kshs. 15M. After retirement, if Jane is to start drawing the equivalent of the salary she had at retirement (Kshs. 113,000 per month, with 4% escalations annually) from the investments (Kshs 15M), and assuming the investments still earn a 10% interest, she would keep drawing forever.
Build A Business to Pass Down
Not all businesses get passed down to the second generation, but those that do, really give the second generation a head start over their peers. There are many factors involved in ensuring a business can be inherited, and the main one has to do with putting structures in the business that will limit in-fighting once the founder leaves (either by retirement or death). Educating the people to inherit the business in the values of the business and in financial matters is also important.
As we have learnt from the last 18 months or so, things happen. A pandemic, loss of jobs, illness etc can greatly affect one’s income. It is important to have both an emergency and a sinking fund.
An emergency fund is used to cover unexpected expenses such as illnesses or a loss of a job while a sinking fund is used to cover expected expenses such as car insurance or a vacation. The importance of these funds is to avoid dipping into long term investments in cases of emergencies. The recommended rate that one should save is about 10% of their income, but the more the better. Finances: The Importance Of An Emergency Fund
Have Multiple Revenue Streams
We have more skills and access to learning resources today than people had 30 years ago. You can easily learn more and sharpen your skills or hobbies (on YouTube for example) and turn them into an income-generating venture aside from your day job. This extra income can go into savings or investments. Alternatively, your side hustle could grow into a business that you can leave to your children.
For your child to better manage what you pass onto them, they need a good education. Give them the best that you can afford, and let them explore their talents. It is important to note that not every child will become a doctor, lawyer, engineer etc. If your child shows an interest in sports, music, arts etc let them explore it. They could be the next Michael Olunga, Sauti Sol, Lupita Nyong’o etc.
Get Life Insurance
Life Insurance protects your family in the event of your untimely death (or sometimes, incapacitation). Getting life insurance will, financially, ease the blow to the family when you are no longer able to provide. You have to research on the best life insurance cover that will work for you. Over 50 insurance companies are offering different life insurance products. Do not just take the words of the sales agents, as their main aim is to make a sale. Talk to people who have had covers with the insurance companies and their experiences. Read the small blueprints before signing on the dotted lines to know what is covered and what is not.
Life is uncertain, and we are never sure about tomorrow. Do not wait to get to a hospital bed or to get to 80 before getting things in order with regards to passing on your wealth. Draw up a will, and update it regularly. Let it be known to relevant parties (spouse, children, parents, siblings etc) that there is a will that you would like respected and followed in case you breathe your last. You Are Never Too Young To Write A Will – Why You Should Do It Now
Building generational wealth is not as easy as it sounds. You must put your finances in order first, then start safeguarding future generations. Most people do not get to put their finances in order, in the first place dealing to black tax. Have a strategy in place that will work for you: whether it is investing in stocks, real estate etc. Pass the knowledge to your children and encourage them to further it.
I am a former investment Analyst who has recently ventured into the business world as a young entrepreneur. In my free time, I use the pen as a sword to shape the world so I can feel how awesome it would have been if I were a writer.