I want to retire by 35. I earn Sh100,000 monthly, spend 64,000. How do I create passive income?

My name is Douglas. I am a single career man aged 30. My monthly salary is Sh100,000. Out of this amount, my monthly budget is:

1. Rent: Sh22,000

2. Food: Sh6,000    

3. Vehicle fuel: Sh10,000

4. Entertainment: Sh4,000

5. Electricity: Sh2,000

6. Black tax:  Sh15,000

5. Loan payment: Sh5,000

From this budget, I am left with Sh36,000 to invest. I would like to stop working and have my money pay me through passive investments within the next five years.  How do I do this with my current income? Where should I trim my budget? Which investment vehicles should I invest in? 

Chacha Nyaigoti Bichang'a, a Financial Coach at Chachanomics Consulting Firm and the author of Mastering Your Money.

To stop working and earn passive income in the next five years, you need to reduce your expenditures as follows:

1. Rent: This constitutes 22 percent of your total income which is exceptionally high. Try to cut down to Sh15,000. 

2. Food: Though your expenditure on food falls within the expected range (5 – 15 percent), you can reduce it by at least Sh2,000. Buy foodstuffs in bulk and reduce take-outs.

3. Transport: Travel by matatu during off-peak hours to cut down the transport expenses. You can alternatively do car-pooling to save on fuel.

4. Entertainment: Reduce by Sh2,000.

5. Electricity: You can minimise consumption by Sh1,000. Do not leave appliances or gadgets on. For example, you can iron once after washing, switch off sockets/bulbs and use energy savers.

6. Black tax: This expenditure consumes 15 percent of your active income yet it is an unnecessary expense. Try to reduce it by Sh10,000. You are spending a lot of money assisting family members who may be taking you for a ride. Have a daily, weekly and monthly meeting with your money, track your expenses, have a candid conversation about money with your parents, siblings and relatives, and empower yourself and your family with financial knowledge on how to earn extra income for sustainability.

From these adjustments, you will end up saving Sh26,000 which you can add to the remaining balance of Sh36,000 totaling to Sh62,000. You can use this disposable income in two main ways. One, you can increase your loan repayment amount by Sh5,000 and reduce the time taken to clear your loan by half. Two, you can boost your investments for early retirement in five years' time by investing in the following vehicles:

i. Sacco: Channel around Sh20,000 to a Sacco of your choice. In five years, you will have saved Sh1.2 million. Assuming your Sacco gives dividends at 10 percent interest on average, you'll earn passive income of Sh24,000 in year one, Sh48,000 in year two, Sh72,000 in year three, Sh96,000 in year four and Sh120,000 in year five. All these totals to Sh360,000. If you plow back the dividends every year, you'll earn much higher returns. Investing in a Sacco has two cardinal advantages: guaranteed annual cash flow in the form of dividends which you can redeem in case of emergency and the savings, which act as a collateral for securing low interest loans.

ii. Unit trust: Start with a money market fund (MMF)where the principal is safe, you can liquidate your savings in two or three days in case of emergency and your savings earn compound interest. Save Sh20,000 from your remaining disposable income. By the end of five years, you'll have accumulated Sh1.2M. Suppose, the MMF on average earns you a compound interest of 8 per annum, you'll garner a total of Sh268,997.03 totaling to Sh1,468,997.03. This amount, however, is exclusive of the 2 percent annual management fee charged.

iii. Property: You can use the Sacco deposit to acquire a loan which is three times your total deposits. You can use the loan to buy a plot for building rental units for the low middle class.

iii. Stocks: You may use Sh10,000, out of your remaining disposable income of Sh17,000, on a monthly basis to buy shares in order to build your portfolio gradually. By five years, you'll have built a huge stock portfolio of at least 1.2 million which will be worth much more depending on the market trends. You'll earn over 100 percent in capital growth and dividends.

iv. Private pension: You can save the remaining Sh7,000 in an umbrella pension scheme provider with good returns. You will be able to accumulate Sh420,000 in five years exclusive of interest.  This money will be crucial in boosting your business.

Rhina Namsia, the founder and chief executive officer of The Acemt Consulting, a training and consultation company that provides financial planning and investment advisory.

To be financially free by age 35, you’ll need to accumulate enough assets to cover your expenses and not worry about going into active work. With your current lifestyle, you need Sh64,000 per month to smoothly run your life. Once you retire at the age of 35, you should keep in mind that you may have more than 35 years to live without working and only depending on passive income. You will need almost the same amount of disposable income every month. Open an Emergency Fund. This is an account that is supposed to cater for your monthly expenses for at least six months or one year. Given your budget, your emergency fund is Sh40,000 (rent, food, fuel, & electricity). For six months you will need Sh240,000. Set aside at least Sh10,000 from the balance you have. Open a money market fund where you could be saving this and be sure to even earn some compounded interest on it.

Black Tax Account: Open an account to cater for your parent’s needs. This way, you won’t have to be bothered to cut into any of your future savings or investments whenever need arises.

Investments Accounts: Some of these accounts are CDS accounts for buying stocks, a CDS account for buying treasury bonds, and a personal Pension fund account. After deducting Sh10,000 for the emergency fund every month, buy some good stocks at the NSE. Start small, with as little as Sh10,000 every month for stocks accumulation, then put Sh5,000 in a personal pension fund. You remain with Sh11,000.

Save in a Sacco: Identify a good Sacco where you can get guarantors and save the balance of Sh11,000. This loan can enable you to build or buy a home or start an income generating business or project. If you save Sh11,000 every month for three years, you will have accumulated Sh396,000. This means after three years you can access a loan of about Sh1 million.

Get another income stream. Monetise a passion that you have and turn it into a cash cow, do Airbnb’s, or even agribusiness. The latter is a bit risky but can give you great returns if all goes well.

Do not forget to assess your risk capacity and tolerance. This will tell you what type of assets to invest in. Invest at least, 35 – 40 percent of your collective investment capital into conservative assets such as the treasury bonds, put 50-55 percent into Equities or stocks and a business, and hold only 5-10 percent in savings and cash to enable you to still run your current life.

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