What you need to know:
- Start by building an emergency fund of at least Sh415,000 that can take care of at least six months of your expenses.
- To achieve your dream of constructing the house, start by buying a plot of land then embark on constructing the core structure.
My name is Ben. I am married with one baby. I earn a net salary of Sh98,000 and my expenses are as follows: Bank loan of Sh14,000 ending October 2024, Sacco loan of Sh9,000 ending September 2024 – two loans I took to start a rural house project, rent Sh20,000, electricity Sh4,000, water bill Sh1,500, shopping and groceries Sh20,000, internet Sh1,500, other household costs Sh2,000, airtime Sh1,000, offering and thanksgiving Sh2,800, mother Sh6,000, transport-Sh5,500, meals at work Sh4,000, and shaving Sh1,000.
I also get Sh5,000 every month from a side hustle. By the 15th of every month, I’m forced to borrow from mobile lenders and friends to sustain myself till end-month. When the year started I was contributing 10 per cent to a money market fund but I have already withdrawn all the cash.
Every month end I get broke with mobile loans and friends’ debts to repay. I would like to get out of debt, buy a plot in Kitengela and build a family house in the next three years. I would also like to complete my rural house project. How do I go about this?
Dominic Karanja, a financial planning and investments consultant
Your monthly expenses add up to Sh92,300 per month and you have extra Sh10,700 which is 10 per cent of your income. You have a Sacco loan although you have not indicated the amount you are saving there.
Consider all your sources of income, which include your net salary and the income from your side hustle, and all expenses when preparing your budget. Also consider your spouse’s income and how much she contributes towards household expenses.
Apply 50:30:20 budgeting rule where your after-tax income will be allocated as follows: 50 per cent to yours needs, 30 per cent to your wants and 20 per cent will cover your savings and investments. I would classify your loan repayments, rent, electricity and water bills, shopping and groceries, transport and meals at work as needs while Internet, airtime, and your mother’s expenses are your wants.
Based on that classification, you are spending Sh79,000 on your needs against expected target of Sh51,500, and Sh13,300 on your wants against expected target of Sh20,600. Start by building an emergency fund of at least Sh415,000 that can take care of at least six months of your expenses, to cushion you in case of unexpected expenses and emergencies. It will also help you stop relying on friends and high interest loans.
Put this in a money market fund. Consider scaling up your side hustle or finding additional opportunities to generate more income. If you reduce your spending by a quarter, you can get extra Sh10,000 which you can direct towards savings and investment. Your target on saving and investments should be at least Sh20,600.
Make your retirement savings part of your financial goals. Save regularly and avoid borrowing new high-interest debts. Continue saving with the Sacco and always remember to capitalise your Sacco dividends to increase your borrowing power, and earn high dividends in subsequent years.
It is recommended that you commit at least a third of your net income towards loan repayments, meaning you can only commit up to Sh31,000 now towards loan repayment after adjusting your expenses. If I consider the same level of income in the next one year and if you were to commit the entire Sh31,000 per month toward loan repayment, you can qualify for Sh1.5 million loan from a Sacco at a reducing balance rate of 12 per cent per annum payable in six years after you clear your current loans in one year.
To achieve your dream of constructing the house, start by buying a plot of land then embark on constructing the core structure and then keep on adding more rooms in phases as you accumulate more resources.
Once you occupy your house you can commit the amount you are spending on rent now towards loan repayments. Once your high-interest debts are paid off, consider resuming contributions to your money market account.
If you have any money problems, send us an email at [email protected]