Chachanomics Financial Advice Published on 17th Sep. 2022 in Saturday Nation Personal Finance Column
Reader's Question
"My name is Vincent. I earn a net salary of $1,120
which after conversion is Sh130,000 . I do get allowance of car mileage of
Sh30,000. My expenses include: car loan which I do regret Sh60,000, house rent
Sh25,000, transport Sh10,000, parents Sh10,000, shopping Sh10,000, internet
subscription Sh2,500, utilities like water and electricity Sh5,000. I'm always
broke. Kindly advise on how I can start saving for my future. I was planning to
build a house in my rural areas and find a space in Nairobi where I can put up
my house to stop renting (possibly Syokimau). I need help and kindly advise
which currency I should be saving, USD or Ksh. Sometimes, I get gigs to do as a
photographer and whatever. I get it saved though I end up using it."
Expert
Advice
From your financial
breakdown, your total income is Sh160,000 (summation of net income plus car
allowance). Your total expenditure is Sh122,500 and a whopping Sh37,500 is
unaccounted for. This points to a bigger underlying problem of financial
wastage and mismanagement. Your car is regrettably your biggest liability
consuming Sh70,000 (37.5% of your income).
To salvage your financial situation, focus on the
strategies outlined below.
1.
Reduce your expenditures
Try to live within
your means by reviewing your expenditures as follows:
i)
Rent. Cut it down from Sh25,000 to around Sh20,000 by shifting
to a cheaper house and save Sh5,000.
ii)
Transport. Reduce it by half and save Sh5,000. Adopt alternative
means of monetising your car to generate additional cash flow such car-pooling,
doing car-boot sales or enrol in a taxi business like Uber. That way, it will
cease being a liability and become a profitable asset.
iii)
Parents. Hold a candid conversation with your parents and reduce
the money sent to them by half and save Sh5,000.
iv) Shopping. Once
you do bulky shopping lasting a month and weekly purchase of perishables, you
may save about Sh3,000.
v)
Utilities. Cut down on enormous consumption of water and
electricity by Sh2,500. Find out what really consumes a lot of water and the
specific electric appliances consuming more power.
You will remain with a disposable income of Sh20,500.
Besides reviewing your expenditure, you need to budget and track your money so
that you can account for every shilling and be able to recover the undocumented
Sh37,500. In total, you will be left with a disposable income of Sh58,000 which
can be prudently used to establish a investment saving kitty and repay your car
loan.
2. Set
SMARTER financial goals
Prudent financial
planning requires that you set robust short-term (3-12 months), medium-term
(2-5 years) and long-term (above years) saving and investing goals. Building a
house in Nairobi (Syokimau) or in the rural areas should be part of your
medium-term plan. Do not just build a house to save from paying rent per se but
build rentable houses or units for you to earn passive income.
3.
Establish a saving and investing strategy
Save for a purpose
(emergency, investment and retirement), invest with a plan (earn more passive
income) and satisfy you risk appetite. For instance, for one year channel
Sh10,000 to a money market fund (MMF) earning at least 9% compound interest per
annum which will give you Sh120,900, send Sh10,5000 to a Sacco making it
Sh126,000, increase car loan repayment by Sh30,000 and use the remaining
balance to boost your passion business. It will take you about ten and half
months (by August 2023) to clear your loan instead of 18 months (by May 2024).
In September 2023, once the loan is cleared you will
remain with a surplus of Sh90,000 a year, boost your saving in MMF will by
Sh18,000 (20%) making it Sh28,000 a month, and increase your Sacco deposits by
Sh45,000 (50%) making it Sh55,500, use 10% (Sh9,000) amounting to Sh16,500 of
the money to boost your gig photography and 20% (Sh18,000) for general upkeep.
By September 2025 (three years), you have saved Sh845,881 in MMF (exclusive of
2% annual management fee and 15% withholding tax) and Sh1,458,000 cumulative
Sacco deposits. Using the 3X multiplier, you will qualify for a loan of
Sh4,374,000 which you can use to buy a plot, build a house or buy one off-plan.
You can alternatively use proceeds from a side hustle to gradually build rental
units.
If you earn in dollars, you need to save in dollars to
cushion you against market turbulences affecting the Kenyan shilling. Automate
your savings (use a standing order or direct debit) to various saving and
investing accounts like MMF, and Sacco.
4. Build your gig
photography business
Invest the
remaining balance of your disposable income of Sh7,500 plus Sh9,000 additional
fund to improve your photography skills. Network with various people, attend
various entertainment engagements, develop a website, market your business and
learn on how to improve your side hustle for better returns which will boost
your savings. Acquire financial education so as to adopt sound financial
discipline, debt management skills, prudent saving and investing habits.
https://nation.africa/kenya/
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