MY PERSONAL FINANCIAL ADVICE SENT TO SATURDAY NATION & PUBLISHED ON CHRISTMAS DAY
Reader's Question
Help! My name
is Ford. I am a single career man aged 30. I have no debts which am looking to
financial freedom. My monthly salary is Sh100,000. Out of this amount, I have budgeted
as follows.
1. Rent: Sh 22,000
2. Food: Sh
6,000
3. Vehicle
fuel: Sh10,000
4.
Entertainment: Sh 4,000
5. Electricity:
Sh 2,000
6. Black tax:
Sh 15,000
5. Loan payment:
Sh 5,000
From this am left with Sh 36,000 to invest.
I would like to stop working and have my money pay me through passive investments within the next five years. How do I do this with my current income? Where should I trim my budget? Which investment vehicles should I invest in? Thank you.
From your budget/spending plan and questions, I have observed the following:
1. It is highly commendable that as a single career man aged 30, you're not living a middle class lie characterised by being trapped in the shame of debt as many youngsters and professionals do nowadays as evidenced by the proliferation of "easy-to-get" digital money lenders that charge exorbitant interests rates.
2. Your finances position looks good and your future is promising on account of your quest for advice in order to attain financial freedom in the next five years. You have two greatest non-monetary assets (which people in 40s, 50s and 60s don't have): age and youthful energy/potential to bounce back should things fail to work out in the realm of business/entrepreneurship.
3. To stop working and earn passive income in the next 5 years, you need to reduce your expenditures as follows:
i. Rent. This constitutes 22% of your total income which exceptionally high. Try to cut down your expenditure on rent by Kshs.7,000 (from Kshs.22,000 to Kshs.15,000). Look for an affordable apartment preferably a bedsitter owing to the fact that you're single.
ii. Food. Though your expenditure on food falls within the expected range (5% - 15%) depending on family size, you can reduce it by at least Kshs.1,000 or Kshs 2,000. Buy foodstuffs in bulk and save on any unnecessary expense of eating out.
iii. Transport. Trim your expenditure on fuel by half, that is, Kshs. 5,000. Do not use your car all the time and travel by matatu during off-peak hours to cut down the transport expenses significantly. You can alternatively do car-pooling to save on fuel.
iv. Entertainment. You can reduce the amount you spend on entertainment by Kshs.2,000 (from Kshs.4,000 to Kshs.2,000).
v. Electricity. As a single man, your expenditure on electricity is rather high. You can minimize consumption by Kshs.1,000. Do not leave appliances or gadgets on unless when using them. For example, you can iron once after washing, switch off sockets/bulbs and use energy savers.
vi. Black tax. This expenditure consumes 15% of your active income yet it is an unnecessary expense. Try to reduce it by Kshs.10,000. You are spending a lot of money assisting family members who may be taking you for a ride. To overcome the allure and temptation of paying black tax, have a daily, weekly and monthly meeting with your money, track your expenses, have a candid conversation about money with your parents, siblings and relatives, empower yourself and your family with financial knowledge on how to earn extra income and become sustainable.
Once you follow the above advice, you'll end up saving Kshs.26,000 which you can add to the remaining balance of Kshs.36,000 totalling to Kshs.62,000. You can use this disposable income in two main ways. One, you can increase your loan repayment amount by Kshs.5,000 hence reducing the time taken to clear your loan by half of the loan period.
Two, you can boost your investments for early retirement in five years' time by investing in the following vehicles.
i. Sacco. Channel around Kshs.20,000 to a Sacco of your choice. In five years, you would have realised Kshs.1.2M. Assuming your Sacco gives dividends at 10% interest on average, you'll will earn passive income of Kshs.24,000 in year one, Kshs.48,000 in year two, Kshs.72,000 in year three, Kshs.96,000 in year four and Kshs.120,000 in year five. All these totals to Kshs.360,000. If you plough back the dividends every year, you'll earn much higher returns. Investing in a Sacco has two cardinal advantages: guaranteed annual cashflow in the form of dividends which you can redeem in case of emergency and the savings act as a collateral for securing low interest loans at a reducing balance which banks do not offer.
ii. Unit trust. This is a pool of funds that invests client's deposits/savings in financial markets in return for a considerable profit. It is advisable to start with money market fund (MMF)where the principal is safe, you can liquidate your savings in two or three days in case of emergency and your savings earn compound interest. Save kshs. 20,000 from your remaining disposable income of kshs.37,000 and you'll remain with Kshs.17,000. By the end of five years, you'll have accumulated Kshs.1.2M. Suppose, the MMF on average earns you a compound interest of 8% per annum, you'll garner a total of Kshs.268,997.03 totalling to Kshs.1,468,997.03. This amount, however, is exclusive of the 2% annual management fee charged by most unit fund providers.
iii. Property. You can use the Sacco deposit to acquire a loan which is three times your total deposits. You can use the loan to buy a plot for building rental units for the low middle class. You can use part of your MMF savings and any money you save from a side hustle to build affordable houses at a preferred location.
iii. Stocks. You can use Kshs.10,000, out your remaining disposable income of Kshs.17,000, on monthly basis to buy shares in order to build your portfolio gradually. By five years, you'll have built a huge stock portfolio of at least 1.2M which will be worth much more depending on the market trends. You'll earn over 100% in capital growth and dividends.
iv. Private pension. You can save the remaining Kshs.7,000 in an umbrella pension scheme provider with good returns. You will be able to accumulate Kshs.420,000 in five years exclusive of interest. This money will be crucial in boosting your business.
v. Business. Starting an income generating enterprise seems worthwhile both in the short-term and medium-term so that by the time you retire early you have something tangible to do. Do an introspection and find out what you're interested in doing during your spare time and weekends. Scan the area where you stay or operate to and from your work place and identify a problem that needs an immediate solution. Equally important is the need to scan your workplace and social media space in order to identify how you can solve the problem people face. If you build a passion business, you'll be able to withstand the highs and lows before your business breaks even. Use part of your MMF savings to start a passion business and build it gradually till you're able to retire and run it full time.
Kinds regards
Chacha
Nyaigoti Bichang'a,
Financial
Coach at Chachanomics Consulting Firm and Author of "Mastering Your
Money."
Comments
Post a Comment