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How realistic are my dreams and what do I need to do to get my finances on the right track?
I am Robert. I am aspiring to buy a plot worth Sh500,000, buy a car worth Sh2,500,000, build a house worth Sh2,600,000 and have savings of Sh1,500,000 in the next two years.
I earn a net salary of Sh130,000. My monthly expenses are as follows:
Rent Sh20000, Shopping Sh15000, Power Sh2000, Water Sh6000, WiFi Sh3000, Netflix Sh1500, Nanny Sh8000, Parents Sh10000, Entertainment Sh5000
I am also servicing a bank check-off loan of Sh63000 monthly, and have defaulted on a mobile loan of Sh200,000. How realistic are my dreams and what do I need to do to get my finances on the right track? How can I reorganise myself to fulfil my needs and goals without pressure and free myself from mobile loans?
Rhina Namsia, the founder and chief executive officer of The Acemt Consulting, a training, and consultation company that provides financial planning and investment advisory.
You have very great ambitious goals. However, from your budget assessment, you are living beyond your means. Your monthly expenses surpass your monthly net income by 2.7 percent which may look tiny, but means you are always left with a deficit every month. The loan you service every month takes 48 percent of your total net income. Looking at your goals, you will need to save per month at least Sh21,000, Sh104,000, Sh200,000, and Sh62,500 for the plot, car, house, and savings goals respectively to achieve them in two years. This may be unrealistic with your current budget and net income status. You will have to adjust both your expenses and income streams. You will also need to prioritise some of your goals over others and stretch their timeline from two to five years. Other measures you need to take are: -
1). Free up some cash by cutting off some of the expenses you feel are not so necessary e. g money sent to parents can be reduced. Adjust on entertainment as well. Manage your utilities, especially water consumption to reduce the amount paid every month. The cash freed up should be saved in an interest-earning account such as a money market. The insignificant amounts will be significant eventually.
2). Set up an emergency fund account and start funding it. With an emergency fund, you can focus on your goals clearly knowing in case of a rainy day, your expenses can still get covered without interrupting your investments. In your case, to cover at least 6 months of your expenses, you need an emergency fund of Sh801,000. Building this fund may take a while but with good cash flow, you can regularly deposit money in that account to ensure it grows. Select a compound interest-earning account such as a money market.
3). Identify a good Sacco and start contributing monthly savings. Saccos are great for issuing members credit facilities against their savings for development. If you save at least Sh10,000 every month you will have Sh240,000 as savings in two years. This can give you a loan of Sh720,000 to fund the plot. As for the car, think of how you can leverage bank financing, but start with repairing your credit score and establishing a good cash flow. The car should be financed up to 70 percent. This will prevent you from having negative cash flows. However, this will only work if your bank statement cash flow is exceptionally good.
4). Have a strategic plan for clearing your debts to free up extra cash. Clear up the mobile loans first. They have the highest interest rates. In the future, when taking up a loan, do a return on investment analysis first before taking up the facility. Stick to productive loans and avoid consumption loans. For instance, do not take a car loan if the purpose of the car is to commute. This will slap an additional strain on your budget including fuel and the depreciation of the asset. However, the car loan can work in your favour where the vehicle doubles up as an income-generating asset such that it contributes to its loan repayment.
5). Increase your income streams. Your net salary alone may not sustain your budget, leave alone fund your goals. This includes investing in assets that can generate passive income as well such as government bonds and bills, the stock market, or a business venture. Find out what you are good at and maximise it.
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