I earn Sh60,000 gross. How do I use a Sh1.5 million new loan?

My name is Estelle. Kindly advise me here; I am a civil servant and I earn a gross of Sh60,000 with a take-home of Sh17,000 after loan deductions. I have a running loan of Sh1.5 million serviced for 1 year. I don't pay rent and I am expecting an increment of around Sh22,000 in September. I need advice on how to save and build a rental property in a prime plot around Eldoret town considering that the bank loan is still fresh and I don't want to top up. I have never joined any Sacco. I’m a 42 years old mother of four. My husband pays school fees and the children’s shopping. Also, I have heard about MMF but don’t understand how it really works.

Benjamin Cheruiyot – the Engagement Lead at Abojani Investments, a personal finance and investments advisory firm

Building rental houses on the land would require intensive capital outlay. As you do not want a top-up on the loan you took, you may have to save for some years before you accumulate enough to begin work on the project.

Depending on the location and materials used, building costs range from Sh250,000 to Sh350,000 per bedsitter. Putting up four bedsitters would require a million shillings. You would need to invest at least Sh19,000 monthly for four years in an account earning 10 percent annual interest. This will make up for inflation-adjusted costs of building. As you expect an increment of Sh22,000 next month, you can strive to build up savings with a plan towards actualising the rental houses project. Working with a building expert to get a bill of quantities will help you get a clear picture of the needed target amounts depending on the building plan. Since you have already acquired a prime plot, you may consider building in phases. This entails laying the foundation and slab, then building unit after unit and renting out the complete units for supplementary units as other units come up.

At the same time, you might want to gauge the option of building and renting out temporary rental units (such as mabati structures) to help generate income that will go towards the ultimate construction of permanent rentals. It is advisable that you join a reputable SACCO. You will get an effective savings and investment platform that also allows you access to credit. From the expected salary hike of Sh22,000, saving Sh5,000 in a SACCO will add up to Sh60,000 after a year. In five years, this will accumulate to over Sh390,000 if interests earned at 10 percent are reinvested. This will grant you access to Sh1.2 million loan as most SACCOs allow up to 3X your deposits.

To attain your intended goals, you need to avoid lifestyle creep. Even with the expected salary hike, you need to maintain your current living expenses to channel most of the increment towards savings and investments. A growing portfolio of savings and investments that post decent returns gives you the confidence to seek ways of increasing income sources.

You also need an emergency fund that equals at least a year’s expenses. In your case, this could be at least Sh300,000. This can be built via a money market fund. An MMF is a collective investment scheme that pools funds from institutional and individual investors who all get an equal rate of return. Interests earned depend on the sums invested. MMFs typically invest in short-term instruments like fixed deposit accounts, treasury bills, commercial papers and short-term maturity bonds. The advantage of MMFs is the liquidity of the funds, thus easy access at any time. Withdrawal orders are executed between 2-3 days. These are funds for short to medium-term goals and also ‘parking’ funds with no immediate purposes. Savings of Sh10,000 in an MMF can accumulate to Sh130,000 at 10 percent interest per annum. In five years, this can add up to Sh750,000 as MMF interests are automatically reinvested.

At your age, you need to consider your retirement in the ‘not so distant’ future. This is the time to aggressively grow your retirement savings if they are inadequate. You may have to work with a financial planner to assess your intended retirement lifestyle and adjust your expected future fund value to inflation. With four school-going children, you need to plan their education by taking education policies. Your medical cover should be comprehensive as illnesses can drastically alter your financial standing if not planned for.

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.