Chachanomics Personal Financial Advice Published in Saturday Nation on 9th July, 2022

 Reader's Question

My name is Naomi. I'm 44. I take home Sh.100,000 after deductions. My budget is as follows:

Wi-fi: Sh.3,000

Netflix: Sh.1,100

Post-paid line: Sh.1,000

Fuel: Sh.12,000

Food: Sh.15,000

Domestic cleaner: Sh.4,000 per month (she comes once a week)

Car loan: Sh.45,000 (exactly a year to clear)

Sacco savings: Sh.5,000 monthly

Sacco saving: Sh.750,000

Personal savings bank account: Sh.120,000

Spouse support: Sh.25,000 monthly plus family home, school fees and service charge catered for

Miscellaneous: Sh.10,000

In case I left employment today, I'd have about Sh.450,000 at my disposal. What investment plan can I make at this time in my life? Can I buy land to put up a holiday home that I can rent out?

Chachanomics Financial Advice

At age 44, you are remaining with 16 years before you reach the mandatory retirement age of 60 years if you are a civil servant. This means that you have reached a critical age bracket (40-50 years) which is usually known as the stage of stabilization after transiting from the take off stage. This is indeed the age of reckoning that can make or break you. That is why psychologists call it the age of mid-life crises but philosophers call it the age of wisdom and understanding.

At this crucial age, you need to develop a robust investment plan which will propel you towards financial independence. Hereunder are five key financial strategies that you should put in place.

1. Review your finances/income and expenditure

From the breakdown given, your total income is Kshs.140,000 (including spouse support, and average monthly income from side hustle of Kshs.15,000). Your total expenditure is Kshs. 131,100 (including spouse support and attendant expenses, miscellaneous). This gives you a surplus of Kshs.8,900 which can be used to boost the Sacco and personal savings.

For a proper review of your finances, you need to work with a budget and track where every shilling goes per day, week and month. Tracking your expenses will help you to cut back on your unnecessary expenses and increase savings for investment. You need to reduce your expenditure on:

a) Entertainment (wi-fi, Netflix and miscellaneous) from a total of Kshs.13,000 to around Kshs.10,000 and remain with Kshs.3,000 disposable income.

b) Fuel expenses. This should be readjusted from Kshs.12,000 to Kshs.10,000 and save Kshs.2,000.

c) Food expenses. Readjust from Kshs.15,000 to Kshs. 10,000 and save Kshs.5,000. Buy foodstuffs in bulk, and stop eating out quite often.

d) Spouse support and other expenses. It is not clear how you spend this money and how much goes to these expense accounts: family home, school fees and service charge).

In total you will accumulate a disposable income of Kshs.23,900 which includes Kshs.15,000 plus the remaining balance of Kshs.8,900. Increase repayment for car loan repayment by Kshs.20,000 so that you will clear it in 8 months (by the end of March 2023). This will leave you with a total disposable income of Kshs.68,900 in April 2023 which will be used to boost Sacco deposits, personal savings etc.

2. Increase your savings on investment and emergency

Your Sacco savings and channel your personal savings to a unit trust fund. Your Sacco deposits of Kshs.5,000 per month should be increased to Kshs.10,000 and by July 2023 you will have Kshs.870,000. After clearing the car loan, increase this amount to Kshs.20,000 per month and in two years (July 2025), you will be able to accumulate Kshs.1,350,000. This lumpsum is a gold mine that will earn you good dividends and act as a collateral to acquire a 3X investment loan.

Your personal savings should be channelled to a safe, secure and easily accessible money market fund which will earn you a compound interest of at least 9%. In a year (by August 2023), you will realise Kshs.540,785. After clearing the car loan, increase personal savings from Kshs.10,0000 to Kshs. 20,000 (remain with Kshs.36,900 disposable income) and by July 2025 you will have accumulated Kshs.1,153,600. After clearing the car, loan direct about about Kshs.15,000 towards buying stocks every month at the Nairobi Securities Exchange (this leaves you with Kshs.11,900).

3. Invest in your children's education

Procure a modest insurance policy once you have carried out due diligence of the available providers. First, use the current disposable income of Kshs.8,900 to acquire an affordable policy of for one or two of your children. But once you have cleared the car loan you, you can renegotiate and increase the premium payment by Kshs.11,900. Instead of relying on spouse support, the education insurance covers will cushion you against unforeseen circumstances like ill-health, incapacitation and even death.

4. Reduce debt on consumption and Increase debt on investment

Remember that an asset is an investment that generates income and a good debt is that can repay itself unlike a bad debt which is a liability to you because it doesn't generate anything like a car or residential home. Use the Sacco deposits to acquire a 3X loan to buy a holiday home in cash instead of going for a mortgage. You can use part of your savings to supplement the Sacco loan. Meanwhile, your disposable cash of Sh.450,000 should be invested in secure investment vehicle with good returns such as a 3 - 5 year treasury bond with a coupon of about 10% payable twice a year. This lumpsum will be crucial in topping up your cumulative sum for home ownership.

5. Write a will and make retirement plans

It is advisable to plan on how your estate will be managed and shared among your children and/or next of kin. Don't procrastinate on this because you may never know what will happen tomorrow. Also, decide on when you want to exit employment instead of waiting for the mandatory retirement age. You need to invest more skills, time and money in your side hustle and make it more profitable so that it can earn you a reliable cashflow to sustain your lifestyle and supplement your passive income from your investments.

https://nation.africa/kenya/life-and-style/saturday-magazine/i-am-44-and-i-earn-sh100-000-net-how-do-i-plan-my-money-for-savings-and-investments--3874246