I have Sh1 million savings. Should I top up with Sh800,000 loan to buy a car I really like?

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What you need to know:

Put your desire to buy a car on hold for now. Instead, invest the Sh1,000,000 that you have saved up in a Treasury Bond – preferably an Infrastructure Bond.

My name is Catherine. I'm 45 and single. I have a net salary of Sh85,000 per month and I get a 13-month’s salary. In 2020 and 2021, I started saving aggressively because of the uncertainties that came with Covid-19. I now have Sh1 million in my savings account, Sh200,000 in my Sacco, and another Sh200,000 in my retirement account in which I contribute five percent of my basic salary and my employer tops up.

I also get an average of Sh80,000 per year from a side hustle. My total monthly bills come to Sh40,000. I want to buy a car with the Sh1 million savings and top it up with a loan of up to Sh800,000 to buy a model that I really like. I can pay in monthly instalments of Sh30,000. I'm planning to save four months of living expenses so that I can sleep easy. Am I making the right decision or about to throw all my savings down the drain?

Alex Kibebe, the founder of Rubiani Wealth Management Ltd and an investment consultant and business development coach.

Given that the uncertainties of Covid-19 were your motivation to save aggressively, you need to grow passive income so that you are not overly dependent on your salary. Your expenses are Sh40,000 and this leaves you with Sh51,000 to save up. You also earn an extra salary of Sh85,000 every year. Here are two approaches that you may consider;

Option One:

If you save up the Sh51,000 for four months, you will have Sh204,000 that will cover your goal of having an emergency fund of at least four months’ living expenses. You then need to top up your funds in your SACCO by about Sh70,000 to get to Sh270,000 so that you can borrow three times of your savings and raise the Sh800,000 to top up for purchasing a car. Once you purchase the car, you will have a monthly loan repayment of Sh30,000, thereby leaving you with Sh21,000 to go towards your savings. Kindly note that your car may cost you more to maintain in terms of insurance, servicing and fueling and this will eat into the funds. If you take this option, I recommend that you save up the funds that remain each month towards your retirement fund. The Sh200,000 currently available for your retirement is quite low.

Option Two

Put your desire to buy a car on hold for now. Instead, invest the Sh1,000,000 that you have saved up in a Treasury Bond – preferably an Infrastructure Bond. You can purchase the Bond directly from a CBK auction or from the secondary market (Nairobi Securities Exchange – NSE). At the prevailing interest rate of 13.5 percent, you will have generated passive income of Sh135,000 per year. Now, invest the Sh51,000 available for savings in a Money Market Fund. At the prevailing net interest rate of 7.5 percent per year, you will have saved up about Sh635,000 by year-end. If you add the interest earned from your Bond investment – Sh135,000 and the Sh85,000 extra salary for the year, you will have a fund of Sh855,000. Invest this fund in an infrastructure Bond with an approximate interest rate of 12.5 percent per year. This will generate an extra passive income of 106,875 per year. Your total passive income will be Sh241,875 or Sh20,156 per month.

If you do the same in the next year – invest your savings, interest from Bonds and extra salary income in a Money Market fund, you will have a fund of Sh961,875 at the end of the year. If you invest this fund in a Bond at a similar rate, you will grow your passive income by Sh120,234 to Sh362,109 per year or Sh30,175 per month. If you do the same in the third year, you will have generated a passive income of Sh41,447 monthly. This passive income will be enough to cover your monthly expenses. You will be financially free! At this point, you can purchase or upgrade your car from the proceeds of your passive income. After this, consider diversifying your investment to e.g real estate. If you keep this investment momentum, you will be ready to retire at the age of 55 with a substantive wealth portfolio and a decent monthly cash flow. Though this second option will require you to forego your immediate desire, it will enable you to secure your financial future, give you enough funds for retirement and potentially secure an inheritance for your child.

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


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