I’m 27 earning Sh83K net. Should I take loans to buy car and build homes?

My name is Peter. I’m 27. I need your advice on how I can achieve these three goals:

 1). To build my parents a house for Sh500,000 (Improvement to the current house)

 2). My own house Sh400,000 (simple structure bricks one/two bed)

 3). Buy Car Sh500,000

How can I achieve this in one year? I currently have savings of Sh180,000 in an MMF account with Sacco savings of Sh70,000. I currently earn a gross of Sh130,000 which translates to Sh83,000 after deductions (Sacco contribution is Sh5,000). I save Sh20,000 in the MMF every month. My rent is Sh15,000, transport and food Sh25,000, telephone and internet Sh5,000, miscellaneous Sh5,000 and family support Sh10,000. I’m open to taking up a loan however I’m skeptical of the repayment plan and its impact on my cash flows.

Inziani Khasiani, financial consultant and the executive director at Klientele Kenya

Your goals have a budget requirement of Sh1.4 million. You mention that you are skeptical about taking a loan and the impact the repayment would have on your cash flows. The reality can be different.

Assuming you take the loan from a Sacco, repayments should not change over the life period of the loan. Two, the repayment plan would take into account what you can afford. Repayments in Sacco are normally for 36 or 48 months. Longer repayments can be negotiated subject to what is commonly known as “condition precedent” (A condition to be performed before the loan agreement becomes effective).

Three, whilst skepticism is good, you need to separate myths from facts and assumptions from evidence.

Both banks and microfinance have many products where individuals with a payslip access unsecured loans.

I will use the route of Sacco loan in my recommendations because the structure is easy and cuts across most Saccos as opposed to banks and microfinance loan structures that vary. You should, however, check with your local bank, whether you qualify for loan financing.

Working backwards from July 2024, you will need a Sacco saving balance of Sh470,000 that will enable you to qualify for a loan of Sh1,410,000 assuming “three times rule” or a savings balance of Sh350,000 that to qualify for a loan of Sh1,400,000 assuming “four times rule”.

Your salary after deductions is Sh83,000. In order to achieve a target adequate to allow borrowing for the three projects, I recommend the following adjustments in monthly spending.

Reduce contribution to MMF from Sh20,000 to Sh10,000, telephone and internet from Sh5,000 to Sh4,000, family support from Sh10,000 to Sh8,000, miscellaneous from Sh5,000 to Sh3,000. Increase contribution to Sacco from Sh5,000 to Sh30,000.

Contributing Sh30,000 per month for 12 months comes to Sh360,000. Add the current balance of Sh70,000, you will be able to access a loan of Sh1,290,000. In order to achieve your target, you will need to get some funds from your MMF account that will be standing at Sh300,000.

If your Sacco allows the “four times rule”, the balance of Sh430,000 will enable you to access a loan of Sh1,720,000. In the alternative, you may scale down your monthly contribution to Sh25,000 and still qualify for a loan of Sh1,480,000.

The question of whether buying a car is a good or bad investment depends on various factors and individual circumstances. The total cost of car ownership is everything you need to spend every year to keep the vehicle running.  These include fuel, maintenance, insurance, and taxes.

Decide whether the financial goals, lifestyle, and transportation needs and benefits you receive from it outweigh the cost or not. This will largely depend on whether you consider it as an investment or as a necessary purchase. If, after revaluation of your financial goals, you take a decision not to buy a car, there are several fixed financial products that the budget can be used 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.