I earn Sh40,000. How do I save Sh1 million to build a family home?

My name is Daniel Kiprotich. I live in Ngong and work in the Nairobi CBD. I earn a monthly salary of Sh40,000. I have a family of three. I want to be saving about Sh10,000 monthly. However, I am currently unable to do so as my expenses often outweigh the money I earn. My rent is Sh13,000. I use Sh6,500 on bus fare. Food takes about Sh12,000 at Sh400 per day. I use Sh2,000 for home entertainment and Sh2,500 for power and water. I send home Sh3,000 and give my spouse the remaining Sh1,000 for personal use. In between, there are times when I get cash from my budget to meet my personal expenses such as weekend entertainment. How can I rearrange my budget so that I start saving Sh10,000 every month? My aim is to build up Sh1 million for my family’s land or own a home.

Chacha Nyaigoti Bichang’a, a financial coach at Chachanomics Consulting Firm and the author of Mastering Your Money

This is the guide on how much should go to every expense item:

Rent: You should not spend more than 20 percent of your salary which translates to Sh8,000 a month. This will allow you to set aside Sh5,000. 

Transport: Spend no more than 10 percent of your salary which translates to Sh4,000 a month and set aside Sh2,500. This would mean that you will have to travel during off-peak hours for less bus fare. 

Food: Spend no more than 25 percent of your salary. This translates to Sh10,000 per month and set aside Sh2,000. Buy foodstuffs and other consumables in bulk. 

Entertainment: Consider doing away with home and weekend entertainment for the time being as you put your financial activities in order. This will free Sh2,000 that you will channel to savings.

Black tax: Reduce this expense to Sh1,000 and set aside Sh2,000. You need to hold a candid conversation with your parents about why you are reducing their stipend.

The rest of the expenses should remain unchanged. Once you have rearranged the budget as shown by the above allocations, you will be able to free Sh13,500. This disposable fund can be utilised as follows:

Establish an emergency fund: Deposit Sh3,500 monthly into a money market fund that can earn you at least 8 percent compound interest per annum. In three years, you will approximately realise Sh136,349 and Sh246,397 in five years. This fund will cushion you against any unexpected eventualities.

Sacco savings: Use the remaining balance of Sh10,000, as per your expectation, to save in a well-managed Sacco that gives annual dividends at a rate of 10 percent or more. In three years, your Sacco deposits will accumulate to Sh360,000 and guarantee you a loan of Sh1,080,000 which you can use to build a house on the family land or act as a down payment for homeownership. You should note, however, that building a house at home or owning a home is not a profitable asset as it will tie your money and reduce disposable income or your earning ability. Instead, consider investing the loan you acquire from a Sacco in a venture or business that can earn you a return of over 10 percent per month.

Start a side hustle: You need to find out what you can do to earn extra income to supplement your salary instead of visiting social joints during weekends. You can equally use your free time to acquire a much-needed skill that will enable you to start a business or service delivery that can bring in extra income.

*****

Stella Chepng’eno, personal finance coach and certified corporate trainer

An analysis of your expenses shows the following percentage allocations:

From the analysis above it is important to note that all the salary is spent on the needs and wants. There is no amount set aside for investment and savings. In an ideal situation, 50 percent of your income should be spent on needs, 30 percent on wants, and 20 percent on savings and investments. In order to achieve your goal of saving Sh10,000 per month, you need to do the following:

Cut costs: This should be done in the following areas by these figures:

·        Rent to Sh3,000

·        Food to Sh2,000

·        Entertainment to Sh2,000

·        Extended family support to Sh3,000.

These cuts alone will get you to your savings target of Sh10,000 per month. Save this money directly through a checkoff or direct debit to a SACCO where you will earn dividends. You may also save through the money market fund where you will earn compounded interest. If you save Sh10,000 at Sacco with the interest of at least 13 percent annually, your money will earn you an extra Sh15,600 per year. This means that you will have at least Sh135,600. In three years, you will have Sh406,800 which will qualify you for a loan three times this amount or equivalent to Sh1,220,000.

You also need to create other sources of income. Your spouse needs a job or a small business activity that will generate funds. You can also use your free days such as the weekends and evenings to do side hustles to supplement your salary. It is critical to note that with the harsh economic times in Kenya one income will not be sufficient to realise your goals. Ideally, every household needs at least three sources of income. 

If you have any money problems, send us an email via: [email protected]or [email protected]