Family Finance

How Kenya’s Middle-class Families are Saying Goodbye to Black Tax

May 15, 2023

For many working Kenyans, salary deductions don’t end at PAYE and other payroll deductions. They are expected to send upkeep money home to support their parents and extended family or put money aside to pay for their sibling’s next term fees.

This extra deduction is called a ‘black tax.’

Black tax is a term used to describe the premium you pay to support your family financially. The money caters to needs such as paying bills for elderly parents, school fees for siblings, or building family homes.

While black tax is intended to help financially support family members, it can be a financial burden if not managed properly. It can hinder growth and put families in a never-ending poverty circle, forcing the next generation to support the previous one financially.

To escape this adversity, savvy Kenyans are taking steps to help their dependants (parents and family) become self-reliant while ensuring they never have to depend on their kids after retirement.

Here are some unconventional paths they are taking to say goodbye to black tax and build generational wealth.

1. Financially Liberating Their Dependants

As Kenya's middle class seeks to break free from the burden of black tax, they are turning to innovative strategies to empower their dependents and build generational wealth economically.

Invest in education and professional development: Education remains a powerful driver of development and one of the strongest instruments for eradicating poverty, as it is strongly linked to economic growth. Middle-class families are funding their dependents' education and professional training to help them develop valuable skills and increase their earning potential. They’re doing this by sending them for higher education at prestigious universities and colleges in Europe, the U.S., Australia, and China. Additionally, they fund entrepreneurship education programs for dependents to help them develop the skills to start and run successful family businesses.

Provide seed capital for entrepreneurial ventures: Initial funding is critical to getting a business off the ground, and it can be incredibly challenging for entrepreneurs who don’t have access to personal networks or traditional funding sources to raise capital. Family members can come together to raise seed capital and support the startups of their dependents.

Mentorship and networking opportunities: This can help their dependants gain exposure to different industries and succeed in their careers. This can be by providing recommendations or endorsements for dependents to help them stand out to potential employers or sharing job openings and leads to giving them access to exclusive opportunities that may not be advertised publicly.

2. Investing Strategically

Black tax makes building generational wealth challenging. Saving and investing when you have to provide for your dependents is almost impossible. While measures such as creating boundaries with siblings or buying health insurance for elderly parents will work, they don’t solve the problem completely.

As such, you should invest strategically to ensure you can lift your extended family from poverty without sacrificing personal goals. That will involve taking measures such as:

Building Family Business: This will allow you to avoid black tax as you can employ your family members in strategic roles where they can earn and be independent. Additionally, it creates a steady income source and reduces your responsibilities, ensuring you free up money for other goals such as retirement planning. Finally, the business can be your legacy if it outlives you.

Investing in Family Office: These private wealth management firms offer a comprehensive solution to managing the financial and investment needs of affluent families. Family offices provide various services such as cash management, asset management, risk management, financial planning, and lifestyle management to help clients manage their wealth effectively and maximise returns.

Seeking Alternative Investment: These are financial assets that don't fall into conventional instruments like real estate, stocks, bonds, and cash. They include non-traditional assets like precious metals, commodities, and collectibles; and investments in private equity, hedge funds, and cryptocurrencies. Alternative assets can be growth or income-generating investments meant to increase a family's net worth and income.

3. Prioritising Retirement Planning

Black tax is primarily used to support retired parents and family members who don't have a retirement plan or are not generating enough income to support themselves.

This situation typically creates a predicament where one is forced to forego their retirement planning to support their dependants. The problem with this approach is that one will unwittingly make their children their retirement plan, which will continue the black tax cycle.

To say goodbye to black tax, you must have a solid retirement plan with investments that can replace your salary. As a rule of thumb, your retirement income should equal 80% of your pre-retirement income.

How can you achieve this?

Retirement Benefits Scheme: These are pension plans established or maintained by an employer that provides retirement income to employees. These schemes are meant to help employees save and plan for retirement while working. Retirement Benefit Schemes can be either defined benefit plans, where the employer guarantees a specific benefit amount, or defined contribution plans, where the benefit amount is determined by the contributions made to the plan by the employer and/or employee. They can also include a Provident fund which pays a lump sum and other similar benefits to employees when they retire or to their dependents on the death of an employee.

Retirement Annuities: This is a legal agreement between a person and an insurance provider, in which the person pays a large sum of money that is then converted into regular income payments that will last for their lifetime. Retirement annuities provide a reliable source of income during your golden years. When purchasing an annuity, you have a two choices. You can pay the entire sum before retiring or make regular payments until you reach your chosen retirement age. After you retire, the insurance provider will give you regular income payments that will last for the rest of your life, as agreed upon in the contract.

Income Investing: This is an investing strategy of designing a portfolio of investments that focuses on generating income rather than capital gains. Income investors seek investment options to generate consistent income streams in retirement. This can include stock dividends, interest earned from bonds, or property rental payments.

4. Taking Estate Planning to The Next Level

Estate planning creates a sustainable approach that ensures all your hard work to avoid black tax does not go to waste in the event of your untimely demise. It allows you to protect your assets to continue your legacy, benefit your dependents, and create generational wealth for your families.

Without estate planning, heirs' rivalry and poor wealth management can lead to loss of wealth and set your family back. Your life legacy will be lost, and dependants forced to depend on other family members. To ensure this never happens, middle-class families are exploring ways that will keep their families financially secure in their absence through:

Insurance: Investing in the right insurance policies can provide peace of mind and security for a family's future. Life insurance replaces your lost income and covers final expenses, while education insurance ensures children receive a quality education.

Setting Up Trust Funds: This estate planning tool ensures that future generations can access resources for education, business ventures, or other investments. They are made to protect your assets while alive and avoid probate when you die. Trust funds are independent legal entities created to own assets and ensure money and property are transferred to family members and used to benefit them.

Appointing a Fiduciary: This is someone you select to represent you and your interests when you aren’t in a position to do that by yourself. Fiduciaries offer power of attorney services and are legally obligated to act in your best interest. They will see that your estate is distributed to your beneficiaries the way you intended. They can help prevent conflict among heirs, avoid probate, save money, and ensure that your assets and investments are well protected and managed professionally.

WRAPPING UP

To break the cycle of black tax, it is imperative that you take proactive steps that will ensure you achieve financial independence and lift your dependents. As seen throughout this article, that will require taking control of your finances and adopting investment strategies that will help your build and protect your wealth.

It is important to remember that different people have different needs. Therefore, seeking a financial advisor's advice can be incredibly helpful in creating a personalized plan that works for your unique financial situation and goals.

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Farah Nurow is an experienced Content Writer who enjoys writing creative and educative articles meant to provoke readers' thoughts. He loves sunny weather and thick books. You can connect with him on LinkedIn.