My name is Ezekiel. My monthly net salary is Sh252,000 per month. Every month, my expenses are as follows:
Food, family entertainment, and miscellaneous expenses: Sh60,000
Parents’ upkeep: Sh10,000
Sacco savings: Sh10,000
Sacco loan monthly instalment: Sh16,000 (outstanding loan balance is Sh130,000)
Car loan monthly instalment: Sh45,000 (outstanding loan balance is Sh260,000)
Savings account: Sh60,000
I would like to save enough money over the next three years to buy a plot worth Sh1 million. I would also like to construct a Sh4 million house to avoid paying rent in the city. I also want to construct a Sh2 million retirement home in the village. Is this doable within three years? What is the alternative investment vehicle that I can invest in and use the returns to finance my projects either in the short or long term without distorting my lifestyle? Please help:
Benjamin Cheruiyot, the engagement lead at Abojani Investments, a personal finance and investments advisory firm, says:
Your total savings amount to Sh70,000. This is 28 percent of your net pay. Your rent expense is only 18 per cent of your net pay, which is lower than the recommendable 20 per cent. There are two options that you can go for from January 2023. One is a Sh7 million bank loan at a monthly repayment of Sh121,000 for 96 months. This can be serviced by the Sh60,000 monthly savings plus the Sh61,000 that will be freed when your loans are paid off in six to eight months. Would you want an expensive loan for projects that you can execute cheaply? No. The other method is raising part of the amount from aggressive savings in the sacco. Move the amount you save in the bank (Sh60,000) to the Sacco Bosa account for the medium-term plot and house projects. By December 2022, your account should be worth Sh500,000, inclusive of sacco interest. Add the Sh61,000 that will be freed when your loans are paid off to the sacco savings. That will amount to Sh121,000. You can continue saving Sh10,000 in a withdrawable account for emergencies.
Interest earned from the sacco, plus monthly deposits of Sh121,000, can easily pull off the entire project cost of Sh7 million. Continuous saving in the sacco, plus reinvestment of interests, will easily add up to Sh3.6 million by December 2024. You will be able to make a partial withdrawal of Sh1.8 million from your sacco. Using a three-times loan multiplier on the Sh1.8 million balance, you could take a Sh5.4 million loan. This loan will cost you about Sh100,000 monthly for 72 months. You can reduce the monthly Sacco savings to Sh21,000 to be able to service the loan. You will continue earning interests on your Sacco deposits as you execute your projects without changing your lifestyle. Meanwhile, if you don’t experience any unforeseen financial setbacks, your emergency savings will have accumulated to Sh300,000 by December 2024. Consider moving this to a money market fund account. Do not use it for anything else apart from emergencies.
Stella Chepng’eno, a financial consultant at Eagle Tact Consultants Limited, says:
An examination of your finances reveals that you have goals amounting to Sh7 million. Currently, you are saving 28 per cent of your income, which is good and can be improved. Saving in the Sacco is a good idea because of the benefits of dividends, interest on savings and the three-times multiplier loans. Saving in a bank account is good but is the money earning interest? If not, then you need to move the money to an interest-earning investment vehicle.
Clear the current loans – the current loans are taking 24 per cent of your income. It will take between six and eight months to clear the loans. You can shorten the period by increasing the repayment amounts. Once you clear the loan, you will have a surplus of 61,000 shillings. In order for you to raise seven million shillings in three years, you need to save Sh195,000 every month for 36 months. Note the cost of inflation will affect your savings, prices of land and construction costs, hence the need to increase the savings to more than the budgeted amount. You can also cushion yourself by investing your money in an interest-earning investment vehicle.
Save towards the project in a financial instrument that will earn you interest. For example, you can save in a money market account earning you 10 per cent interest per annum. In 36 months, with savings of Sh180,000, you will have saved Sh6,480,000 and earn a cumulative interest of Sh905,264 less withholding tax of 15 percent. You can also increase your savings in the Sacco and earn. This is a medium-risk investment avenue with medium returns. You may also opt for a side business such as a consultancy to increase your income. This can give you very good returns but it is also high-risk. Other risky ventures would include speculative buying of securities and joining an investment club or chama that is dedicated towards investments in buying and selling of land. This might take longer than three years to get maximum benefits. After clearing the pending loans and updating your savings, you could borrow Sh7 million from the Sacco. Repay this loan at 155,711 shillings for 60 months. However, there are factors to consider before borrowing the loan such as job security, alternatives to repay the loan if there is no more salary, collateral for the loan, cost of the loan, and disposable income to repay the loan.
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