I earn Sh60,000 but I’m only left with Sh2,500 due to loans. How do I raise cash to build mabati rentals?

My name is Ibrahim. I am a bachelor earning Sh62,000. I spend as follows: Rent Sh10,000, Transport Sh6,000, Food Sh6,000, Entertainment Sh4,000, and Chama Sh1,500. I have a loan balance of Sh1,025,000 of which Sh32,000 is deducted monthly, I also have a credit card balance of Sh46,000. I took the loan and bought two plots, then started a business which closed down because of poor management. I wish to build iron rental houses in one of the plots to fetch Sh30,000 to Sh40,000 monthly and continue with my degree which needs Sh230,000 in funding. How do I realise these goals?

Dominic Karanja, Financial planning and investment consultant

It is recommended that you commit at least a third of your net pay towards loan repayment but in your case, you have committed 52 per cent of your net pay towards payment of your term loan.

At the current installments of Sh32,000, assuming an interest rate of 15 per cent on a reducing balance, it would take you three and half years to complete paying the loan. 

If your income doesn’t increase in future, it will be hard for you to undertake new investments before you complete paying off your loans since you have committed a lot of your income towards loan repayment. Credit Card Loans are very expensive, and you need to prioritise its repayment. Since you only have an extra Sh2,500 from your monthly net income which you can commit toward the payment of the credit card loan, you will have to reorganise your monthly budget in order to be able to manage your debt repayments. I recommend that you adopt a debt avalanche repayment method where you will be making minimum payments on all your debts, then use any remaining money to pay off the debt with the highest interest rate. Lower your entertainment spend to 2 per cent of your net income thus saving Sh3,000. You can use this amount to increase the payment amount for your credit card loan. Your transport cost is taking 10 percent. Consider reducing it to six per cent of your net income thus saving Sh2,000.

It is recommended that you commit 20 percent of your net pay towards savings and investment but in your case, you are only saving 2,500 in a Chama which is only 2 percent of your net monthly income. If you're not earning interest from your Chama savings, you need to consider exiting it because your money is not giving you returns. Invest the amount you are saving in a Chama in a market fund (MMF) because it guarantees you some returns. 

If you save Sh2,500 per month in MMF at a compounding interest rate of 8 per cent per annum you will have a saving balance of roughly Sh31,000 in one year. Once you accumulate enough savings in MMF you can use the funds to start funding your school fees. I recommend that you save with a SACCO at least Sh2,000 that you’ll get from reducing your transport costs. With that level of savings, you will have saved at least Sh24,000 within one year. Always remember to capitalise your SACCO dividends to deposits to help increase your borrowing power and earning of high dividends in the subsequent years.

What is the value of the other plot? This valuation will allow you to know if you can raise funds by disposing of it in favour of setting up mabati rentals on your other plot. This will not only create an additional income stream but will help you grow without having to wait for three years to finish off your loan repayment and free surplus cash. If you take this route, it would be advisable to set aside a percentage of the new income to repay your main loan’s principal in order to get debt free faster and have adequate cash flow.

If you have any money problems, send us an email at [email protected] and leave your number for contact. Money questions will be answered in this column.