I’m 22, earning Sh65,000. How can I build a Sh14m house by the time I’m 26?
The secret to financial security and wealth accumulation is risk and debt management.
My name is Edward. I am a flight instructor. I am 22 years old. My monthly basic salary is Sh15,000. I am paid Sh2,000 per hour of flying. This totals to an average of 25 hours of flying every month and Sh50,000 every month. My total then goes to Sh65,000 every month. I pay Sh22,000 in rent for a house close to my workplace. I have two insurance savings accounts with Sh17,000. I spend Sh10,000 per month on fuel and another Sh10,000 on normal household spending. The rest of the money is spent on entertainment and miscellaneous expenses. I would like to own a house by the time I am 26, and it is likely to cost me Sh14 million. How do I go about it without getting into financial trouble? Is this a realistic dream?
Chacha Nyaigoti Bichang’a, a financial coach at Chachanomics Consulting Firm and the author of Mastering Your Money, says:
A closer look at your financial report reveals that you are overspending on rent and transport by using your car. For example, your rent expenditure is 33 per cent which is more than the recommended average of 15 per cent and your car expenses is 15 per cent which is more than the recommended average of 10 per cent. On the other hand, your savings in two insurance accounts is remarkable because this accounts for 26 per cent of your total income. This may, presumably, be considered your emergency fund that can cushion you against unexpected eventualities.
To achieve your financial goals in four years without experiencing any financial problems, you should consider the three strategies illustrated below:
1. Review your financial goals
You should ask yourself introspective questions such as: Why do I need to own a house worth Sh14 million in four years? Do I have enough savings to achieve this goal? What kind of profitable investments can venture in? These questions will help you review your financial goals and determine how much you need to save so as to achieve your respective goals, for instance towards emergency, home ownership and investment projects. This will inform the extent to which you will readjust your budget.
2. Review your budget and spending pattern
You need to readjust your budget and reduce expenditure on rent and car expenses as follows:
a) Rent: Reduce your spending from Sh22,000 to around Sh10,000 (15 percent) and remain with Sh12,000 disposable income.
b) Car expenses: Cut back your expenditure from Sh10,000 to Sh6,500 and retain Sh3,500.
c) Other expenses: Reduce your spending or topping up on food, movies from Sh6,000 to Sh3,000 and remain with Sh3,000.
Meanwhile, your expenditure on basics and deposits into insurance accounts should remain intact. However, you need to specify what you call “normal spending”. This may imply you are not sure how much you spend on other basic items like water and electricity. You need to learn how to track where every shilling goes to reduce wastage.
3. Establish an investment saving mechanism
As much your saving in insurance accounts is commendable, you need to save for investment purposes such as home ownership. Once you have cut back on your expenditure in the various items we have examined, you will realise a disposable income of Sh18,250. This is a modest sum that can be channelled to a well-run Sacco. In four years, the monthly deposits will accumulate to Sh876,000, which is exclusive of annual dividends. To get optimum returns, you need to plough back the dividends. The Sacco deposits will guarantee you a three-multiplier loan of at least Sh2,628,000.
This will enable you to buy a plot and start constructing rentable houses for low-income earners, which are more favourable investment options. Your insurance savings in unit trusts will come in handy as a top up to complete your project within a short time and then replenish the savings once you start getting additional income from rentals. Assuming that you will not deplete the insurance accounts, you will realise Sh932,918 at a compounded interest of nine percent (inclusive of 15 percent withholding tax). Furthermore, you need to explore other possibilities of generating more income, especially since you are young and have time as an advantage.
Benjamin Cheruiyot, the engagement lead at Abojani Investments, a personal finance and investments advisory firm, says:
Out of your Sh65,000 income, your total spending amounts to about Sh45,000, leaving you with Sh20,000. However, your rent takes 34 percent of your income against the 20 percent recommended. You also need to check your normal spending of Sh10,000 and car fuel expense of Sh10,000 monthly. You live near your workplace and need to explore whether this fuel expenditure is viable. Cutting down on unnecessary costs will leave you with more disposable income to save or invest.
You are a young person with a desire to undertake an ambitious plan but with a weaker resource base. Put a hold on your house idea until your finances improve or your investments start streaming greater returns. You have started well by taking long-term insurance-based savings products with low-return-low-risk profiles. Generally, a young person should take on more aggressive risk because they have more time to recover from any temporary setback.
Your ability to take risk is informed by your resource capacity. Given your limited resource base, you need a solid investment plan to concentrate your disposable cash. An investment plan is an essential place to start from so that you can acquire knowledge in a systematic manner in line with your investment goals.
The secret to financial security and wealth accumulation is risk and debt management, which entails being adequately insured, paying off short-term loans and living within your means by establishing a budget and adhering to it. You need to redefine your objectives to make a budget that is realistic.
First, your objective of owning a Sh14 million house in four years may be unrealistic at this point since you have not saved enough to even buy a modest house at a quarter of that value. The wealthy develop courage to invest in uncharted waters by acquiring knowledge through small simulation and detailed analysis of the opportunity in view of the broader economic issues pushing growth in your target area of investment. Investments into which you can dip your feet gradually include:
Stocks: Invest in companies with demonstrated earning power and meaningful dividends over the years to minimise chances of capital loss.
Fixed income instruments: Treasury bills and bonds guarantee you interest and secure your principal amount.
Unit trusts: For short-term orientation goals, you could join a unit trust, particularly one that guarantees you returns at low levels of risk, for example the money market funds. You could save Sh10,000 monthly to accumulate Sh550,000 (inclusive of eight percent interest annually) in four years to meet your short-term goals.
Sacco: Join a Sacco and save Sh15,000 monthly to afford you Sh900,000 inclusive of reinvested dividends (at 10 percent interest annually) in four years, which will help you afford a three-times multiplier loan to finance your first plot.
Financial literacy: Join financial master classes for beginners to gain knowledge, skills and confidence to make financially responsible decisions. It is not the plan that fails but failing to plan. Time and chance are on your side. Maximise on them.
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