Chachanomics Advice Published in Saturday Nation on. 20th Aug. 2022
Reader's Question
"My name is Bob. I earn a net salary of Sh70,987 after
statutory deductions. My deductions and expenses include: Sacco deduction
Sh8,000 (Sh5,000 back office and Sh3,000 front office). Education policy of
Sh6,000, car loan of Sh23,000 (Sh16,000 principal and Sh7,000 interest. Loan
balance stands at Sh600,000) parents and siblings minimum monthly Sh10,000, TV
subscription Sh2,800, household shopping Sh15,000, group contribution Sh2,000,
car fuel Sh4,000. Sometimes, I feel pushed and end up using the Sh3,000 front
office. In fact, right now, I have nothing in the front office account. I am
only lucky I don't pay rent and utility fees because I live in company
premises. I would wish to vacate one day. What can I do to have my won home? I
have always loved to invest in the money market, how, how can I identify a
profitable one?"
Response
A close examination of your financial breakdown reveals that
your total expenses is Shs.70,800. This implies that once you substract totally
expenses from the net salary you remain with a measly figure of Shs.187. That
is why you have indicated that you are living from hand-to-mouth without
substantial savings and investments. The greatest liability which is consuming
a bulky of your money is the car which takes Shs.23,000 (32.4% of your net
salary) leaving you with unsubstantial amount for saving and investing.
Therefore, to achieve your financial goals of owning a home, and
investing in the money market among others, you need to do the following.
1. Calculate your net worth and budget/track your money
Calculating your net worth means determining how much you are
worth financially and how long you can survive in case you lose your job or
exit. Your net worth is the sum total of your assets (both fixed and current)
and liabilities (borrowed money or loans). From your breakdown, you do not seem
to have any tangible asset except the car, which is more of a liability because
it only takes money from you.
The fact that you are financially pressed to withdraw the money
saved in the FOSA account means that you are living beyond your means. The
Sh187 balance from your total expenditure is an indicator that you have serious
challenges in budgeting, tracking your money and saving adequately.
Use the 80/20 rule, which can further broken down to suit your
precarious financial situation. The budgeting guideline requires that you have
to pay yourself first by saving at least 20% of your total income.
Considering that you do not pay for rent and utilities, you need
to review your expenditure significantly as follows:
i. Parents and siblings. Reduce this expense
from Sh10,000 (14%) to Sh7,000 and remain with a disposable sum of Sh3,000.
ii. TV subscriptions. Do away with this
expense for the time being by using the free-to-air option and save Sh2,800.
iii. Household shopping. By buying essential
foodstuffs and other basic items in bulk and monitoring the rate of consumption
to reduce any wastage, you may save at least Shs.4,000.
iii. Car fuel. You should not use
your car all the time, sometimes you can use Matatu or opt for car-pooling to
save on fuel consumption. You can save at least Shs. 1,000.
After the expenditure review, you will gain an extra Sh10,800. Use
Sh7,800 to increase the car loan repayment. Once you do that, you will pay
Shs.30,800 for the car loan. It will, therefore, take 20 months to clear the
loan instead of 26 months.
You will also have a disposable income of Sh3,000 which you can
use as an emergency fund put in a money market fund. It is important to clear
this loan as fast as possible to release the money held up. Since your car is a
liability, you may also want to evaluate how you can convert it into an
income-generating asset. For example, can you enroll it for online taxi in your
free time? Can you do boot sale over the weekend? You mentioned Sh2,000 group
saving. This shouldn't be a merry-go-round. If it is, you need to direct this
money to an interest-earning investment vehicle once the group cycle is
complete.
As regards your savings, 20% of your net income translates to
Sh14,197. This is the money save in your Sacco (Sh8,000) and education policy
(Sh6,000). Once you clear the loan, you will have a surplus of Sh30,800 which
you may use to increase you Sacco BOSA savings to Sh20,000 and FOSA (withdrawal
saving fund) to Sh5,000 and the other remaining Shs.10,800 can be saved in a
separate interest-earning money market fund account. Considering the unstated
cumulative amount you have already saved in a Sacco and additional top up, in
three years, you will have at least Shs.720,000. Using the 3X multiplier
factor, you will obtain a loan of around Shs.2.1M. This is a modest sum that
may be used as a down payment to acquire a house through an affordable mortgage
scheme or buy a plot to start building once you supplement it with savings from
MMF, FOSA or withdrawal saving account and your side hustle or passion
business.
2. Invest in your financial education
You should bear in mind that more money, a high-paying job,
higher education and high-sounding financial dreams do not solve money problems
in any way. It is only the acquisition of financial literacy that can help you
achieve financial freedom. Invest in learning financial skills about financial
planning, budgeting, debt management, saving and investing, protecting assets
and monetising your skills. Hire the services of a financial coach, read
personal books, watch YouTube videos, attend financial seminars and workshops.
For example, to learn about financial markets (investing in unit trusts,
government securities, stocks, forex trading etc.), You have to devote valuable
time to study certain market fundamentals like company profitability,
management system, stability and growth prospects of opening frontiers that
will generate further revenue.
3. Identify your passion business
Once you acquire financial knowledge and skills, you will beat able to identify your passion and monetise it. You may discover that you are good at photography, video-recording and editing, creative writing or blogging, speaking engagements, among others.
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