Financial Advice in SN on 14/01/23 Published on

"I got a salary increase: Should I buy a plot or car first?

"My name Bright, 32 married with a kid. I got a salary increment from 70k to 100k net, this December. Kindly help me to plan and also come up with an investment plan. my monthly expenses are as follows; rent ksh 10000 (though relocating soon for a bedroom house of 15k), shopping 5000, food 6000, emergency saving ksh 5000, bills sh 5000, chama 2000,entertainment 5000 and parents 2000shopping, I bought a parcel of land with a bank loan in 2020 with a repayment period of 6yrs at 14000. I am planning to build a two bedroom house in this plot and also buy a car, kindly advise me which development is best and wise to begin with and how. Am very afraid to join any saccos. This is because the last sacco I joined collapsed with my 400k savings and have not been able to be refunded. Which are the best investments that can give me passive income or lead me to financial independence or What adjustments would you recommend I make on my finances?"

Expert Advice

Your total expenditure per month is Sh54,000 (including loan repayment).  Using Sh70,000 as the base, Sh16,000 is unaccounted for. Here are a few suggestions you can put in place to attain financial freedom.

1. Maintain your lifestyle despite the increment

This would mean that you reassess the reasons behind your intention to shift to a more expensive house. Is your current house so small that you would like to move to a more spacious one? Are you motivated by the salary increment that affords you the ability to pay for a more spacious or expensive house? It would be more prudent to refrain from spending more in rent so that you have more disposable income to increase your savings for purposes of investment.

2. Readjust and track your expenditure to reduce wastage

 The Sh16,000 which is unaccounted for implies that you are not keen on some little expenses here and there that ultimately amount to a significant amount. Tighten your purse strings so that you readjust some of your expenses like utility bills (water and electricity expenses). If you reduce the bills by half, you will save Sh2,500. Equally entertainment expenses should be reduced or channelled towards emergency saving or miscellaneous expenses.

3. Increase loan repayment

 Use part of the salary increment to increase the loan repayment by Sh10,000 (from Sh14,000 to Sh24,000). By now you have paid about Sh504,000 and the remainder can be paid in one year and nine months. That is by the end  of 2024, you will have cleared the loan. This will free Sh24,000 which can be invested in profitable business ventures.

4. Increase your savings

 You are currently saving Sh5,000 for emergency and Sh2,000 in a Chama totalling Sh7,000 (equivalent to 10%). Considering your increased income, you need to increase your total savings to over Sh30,000 spread as follows:

i. Emergency (10% of total income)

Channel Sh10,000 into a money market fund paying a compound interest of at least  9% by considering the current rate of inflation and performance of the investment company. In three years, you will have accumulated Sh393,372 (inclusive of 15% withdrawing tax and 2% annual management fee). This figure will roughly translate to three months' average total  expenditure assuming your total expenditure will be Sh100,000 per month.

ii. Sacco (15% of total income)

Channel Sh10,000 to a Sacco. Do not loose hope on Sacco savings even if you lost Sh400,000 through the collapse of your previous Sacco. You need to carry out due diligence and find out a well-managed Sacco to which you can channel your deposits. In three years, you will have accumulated Sh540,000. Using the 3X multiplier factor you may qualify for a loan of Sh.1,620,000. You will also benefit greatly from the annual dividends of about 10%. Unlike bank loans, Sacco loans are repaid on a reducing balance and the proceeds are ploughed back and members benefit in terms of dividends and other affordable financial services.

iii. Take an education cover for your child

 You can procure a ten-year policy with an insurance firm and pay Sh4,000 monthly premium. This ensures that your child's education is assured.

4. Have an investment strategy

 In the meantime, it may not be profitable to take a loan to build a two-bedroom residential house. Buying a car will also not be profitable unless it so converted into a taxi business. Consider constructing single room rental units if the land is in a commercial centre or town. You may take a Sacco loan of about Sh1.5M. Once you have cleared your bank loan, you will have more funds to build more rental units that will earn you more passive income and fund a side hustle.

In sum, here is a summary of your budgetary allocations: 

Sacco: Sh15,000

Education policy:Sh4,000

Bank loan: Sh24,000

Rent: Sh10,000

Shopping:Sh 15,000

Food: Sh6,000

Emergency: Sh10,000

Bills:Sh2,500

Chama:Sh2,000

Parents' shopping: 2,000

Miscellaneous: 4,500

5. Start a side hustle.

To supplement your income, you need to find out what else you can do during your spare to earn more income if your are employed. Acquire an additional skill in line with your passion or use the skills already acquired to start a business of your choice.

https://nation.africa/kenya/life-and-style/lifestyle/i-am-a-matatu-driver-earning-sh1-200-daily-but-i-don-t-know-where-my-money-goes-4085982