Chachanomics' Financial Advice in Saturday Nation Sun. 15th Jan. 2023

Reader's Question

My name is John. I am 32, married with one child. I got a salary increment from Sh70,000 to Sh100,000 net. My monthly. My monthly expenses are as follows; rent Sh10,000 (though relocating soon to a Sh15,000 house), shopping Sh5,000, food Sh6,000, emergency saving Sh5,000, bills Sh5000, chama Sh2000, entertainment Sh5,000 and parents Sh2,000 shopping. I bought a parcel of land with a bank loan in 2020 with a repayment period at Sh14,000. I am planning to build a two-bedroom house on this plot and also buy a car. Kindly advise on which development is best to begin with and how. I am very afraid to join any saccos. The last sacco I joined collapsed with my Sh400,000 savings. 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? Please help.

My Expert Personal Finance 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 passive 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 pee cent). Considering your increased income, you need to increase your total savings to over Sh30,000 spread as follows:

i. Emergency (10 pee cent of total income): Channel Sh10,000 into a money market fund paying a compound interest of at least  9 percent. In three years, you will have accumulated Sh393,372 (inclusive of 15 percent withdrawing tax and 2 percent 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 percent of total income): Channel Sh10,000 to a Sacco. You need to carry out due diligence and find out not loose hope on a well-managed Sacco to which you can channel your deposits. You will also benefit greatly from the annual dividends of about 10 percent.

iii. Take an education cover for your child: Shop around and see if you can procure a 10-year policy with an insurance firm and pay Sh5,000 monthly premium. This ensures that your child's education will be safeguarded. When doing this, be cautious with term and conditions and their impact on your payments, and defaults, or premature withdrawals from the package offered. 

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 is 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 gradually 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: Sh5,000, Bank loan: Sh24,000, Rent: Sh10,000, Shopping:Sh 5,000, Food: Sh6,000

Emergency: Sh10,000, Bills:Sh2,500, Chama:Sh2,000, Parents' shopping: 2,000, Transport: 5,000, Miscellaneous: 8,500.

5). Start a side hustle: To supplement your income, you need to find out what else you can do during your spare time to earn more income if you 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

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