My name is James. I’m 39 and earn a net salary of Sh103,000. My expenses are as follows: House rent Sh20, 000, internet and pay TV Sh5,000, food Sh13,000, fuel Sh15,000, school fees Sh60,000 per term, tithe Sh10,000, black tax Sh10,000, wife 5,000, Miscellaneous Sh5,000. I have the following goals:
1). Have an investment that brings me decent passive income.
3). Purchase a new model Harrier vehicle worth about Sh3.5 million (currently driving 2008 old Harrier)
Dominic Karanja, a financial planning and investments consultant
You should not let living costs run your life and its time you make choices about your lifestyle and spending habits. Your monthly expenses add up to Sh98,000 per month and you only have Sh5,000 left. You have mentioned that you own a car though you have omitted the normal expenses associated with motor vehicle like repairs, normal service, and insurance. It’s important to ensure that you consider all your expenses when preparing your budget. The extra Sh5,000 and the miscellaneous expenditure is likely going towards your car expenses.
I would urge you to apply 50:30:20 budgeting rule where your after-tax income will be allocated as follows; 50 percent for needs, 30 percent wants and 20 percent your saving and investments. Based on this, you are spending Sh63,000 on your needs against expected target of Sh51,500 and Sh35,000 on your wants against expected target of Sh30,900. Though the amount you are spending on house rent and food is within the target you need to consider lowering the amount you are spending on car fuel and school fees since they’re taking each 15 percent of your net income. Spend 5 to 10 percent of your net income on your transport cost to save around Sh7,500 on fuel. With escalating fuel cost you need to consider alternative means of transport like carpooling or even public transport. Your 2400cc Harrier is not as fuel efficient as other cheaper, more efficient and decent second-hand, locally-used options in the market that you can consider to save more money as well as raise money from the sale.
If you move your children to a cheaper school, you can save Sh5,000 per month which is a third of the school fees. Though there is no recommended amount of black tax, I would recommend that you dedicate not more than 5 percent of your income for it to save Sh5,000. You should consider reducing your internet and Pay TV expense by half so that you can save Sh2,500. Your spouse need to be involved in some income generating activities so that you can save the 5 percent of your income that you are paying her. The income that your spouse will be generating should assist in paying some family expenses. Based on your income the target on the saving and investment should be at least Sh20,600 but you can manage to save and invest at least Sh30,000 from these cost cutting measures.
Set up an emergency fund that can cater for at least six months of your expenses. If you manage to lower your monthly expenses to around Sh70,000 per month, you will need an emergency fund of at least Sh420,000 and I would encourage you to invest at least 70 percent of your emergency fund in a Money Market Fund (MMF).
Start saving with the Sacco and always remember to capitalise your Sacco dividends to help increase your borrowing and dividends. There are many Saccos that offer savings, loans, and investment products; however, you need to consider joining a Sacco where you can get friends who can guarantee you in case you need a loan.
You will need to prioritise your Capital expenditure. I would recommend that you prioritise building a house first, however you cannot afford to raise Sh3.5 million that you need to construct the house now because of your current income. It is recommended that you commit at least a third of your net income towards loan repayments, meaning you can only commit Sh31,000 now towards loan repayment after adjusting your expenses. If you were to commit the entire Sh31,000 per month toward loan repayment you can qualify for Sh1.5 million loan from a financial institution at a reducing balance rate of 20 percent per annum payable in three years. This, still would be far off from your budget of Sh3.5 million.
To achieve your dream of constructing the house you can use the incremental housing concept. You can start by constructing the core structure then keep on adding more rooms in phases as you accumulate more resources and then commit the amount you are spending on rent now towards future loan repayments. You will need to defer the plan of trading in your old car for a new car till your income improves, especially with the current cost of new cars.
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