Is it wise to spend Sh6 million to build a small family house?

I am an accountant, and have a combined net income of Sh240,000 with combined expenses as follows: Rent Sh22,000, food and house expenses Sh20,000, transport Sh15,000, electricity Sh3,000, projects Sh20,000, loans Sh120,000, savings in Sacco Sh15,000, MMF Sh10,000, investment chama Sh5,000, family Sh5,000.

We have accumulated savings as follows: Sacco Sh900,000, MMF Sh600,000. On liabilities, I have a Sacco loan of Sh1 million. We took a loan of Sh2.6 million last year to purchase a plot and we intend to pay it off by the end of 2024 hence the reason we are paying a huge amount instead of the required Sh47,000.

We are also eying the adjacent plot estimated to cost Sh1.5 million and want to build within the next three years (around Sh6 million). How can we save and get a good passive income, and is it wise to invest Sh6 million in building a house where not much savings will be realised?

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

Your total spending is Sh235,000. There is an unaccounted-for Sh5,000. I guess this goes into miscellaneous expenses like airtime and data bundles. You have kept rent below 10 per cent of your total income.

All other expenses are quite modest. You truly understand what living on a budget is. I am only curious about the “project” allocation.

Is it a sinking fund for home ownership? Whatever it is, I expect it to be in a money market fund account. You should be earning daily or monthly interests on the money as you wait to attain the target savings.

You already hold Sh600,000 in an MMF. These accounts work well with emergency savings. If you do not have an emergency fund, aim for at least six months’ worth of recurrent expenses in such a fund.

This protects your long-term investments from premature redemption that often results in loss of capital.

The decision to pay down your loan in a shorter time saves you additional interests. At the end of 2024, you will have a surplus on your budget of Sh120,000.

You need to plan for this amount to avoid unnecessary splurging. This amount will be key in your short-term and medium-term goals of increasing passive income through capital markets investments, or your homeownership plans.

This expected surplus can fund the acquisition of the adjacent plot through a Sh100,000 monthly loan repayment in about 18 months.

If you opt to borrow for your home construction, you will incur at least Sh140,000 per month for about 84 months to service a Sh6 million loan.

A mortgage may be cheaper. You need to rethink this option especially if it’s for your residential home.

Since your rent is only Sh22,000, you are better off building at your own pace from monthly savings in two to three years.

By then, MMF savings will be over Sh1 million. You could use this to put up the foundation. Allocating Sh140,000 to the building project will realise completion in four years.

This will save so much in interest expenses compared to if you opt for a bank loan. You should not rush to execute this project.

Passive income is earned from Sacco, bonds, MMF interests, and stock dividends. You already enjoy Sacco interests of about Sh90,000 (at 10 per cent per annum) and about Sh6,000 monthly in MMF interests.

If you forego the plot and housing projects, you will be able to save Sh1 million by August 2025 and invest in a Treasury or Infrastructure bond which are currently earning up to 18 per cent annually.

This may earn you Sh90,000 every six months. You could also scale up your monthly Sacco deposits to Sh30,000 and MMF monthly savings to Sh30,000. These will earn you more in passive income.

NSE-listed stocks like BAT, Carbacid, Stanbic, Standard Chartered, Williamson Tea have consistent dividend payments, besides capital gains potential. These could also be ways to diversify your investments.

However, you may want to learn more about stocks and find an anchor counter for your stock portfolio.

Increasing passive income requires money for investment capital. Your current budget may not allow you to increase investments until you are through with your current loan.

Is your chama into table banking? Are the returns meaningful? Evaluate the opportunity cost too.

The desire to own a home is not untimely. Investing Sh6 million depends on your expected family size, furnishings and finishing quality.

All said, aim at maximising monthly savings and investment returns to fund your dream home.

If you have any money problems, send us an email at [email protected] and leave your number for contact. Money questions will be answered on this column.