This January, I will be turning 35. My net salary plus commissions averages at around Sh130,000 per month. I am not keen on getting married but I would like to have a baby through IVF (surrogate-route) before I hit age 40. My budget for this would be at between Sh500,000 and Sh1 million. I don’t have a side business. I am not enthusiastic about entrepreneurship. I don’t think it is my stronghold.
That said, I would like to start planning for my retirement this year. I don’t want to be working as hard as I am currently doing at age 50 and above. This means I want to sort out my retirement within the next 15 years. How do I achieve this with the income I am currently earning? What assets should I target? Is land a good option? I currently have bank savings of Sh680,000.
My general expenses are Fuel: Sh10,000, Vehicle Maintenance: Sh5,000, Rent: Sh38,000, Power & Water: Sh3,000, Househelp: Sh12,000, Black tax: Sh15,000, Food & Shopping: Sh25,000, Entertainment: Sh10,000, Chama: Sh5,000, Saving Sh5,000, Airtime: Sh1,000.
Benjamin Cheruiyot – the Engagement Lead at Abojani Investments, a personal finance and investments advisory firm
Your retirement goal in fifteen years is possible only if you accumulate at least Sh10 million in cash flow assets yielding Sh1.2 million annually to cover your regular expenses. Even so, you would need to get rid of one major expense: rent; which is about 35 percent of your income. You can eliminate this by setting up plans for home ownership. With land ownership being in your radar, you need at least Sh2 million for a 50x100 plot in a location you intend to build your home.
Borrowing Sh2 million will cost you Sh44,000 monthly for six years. Actualizing this will require you to cut out or reduce some costs. For example, moving to a Sh25,000 house will free Sh13,000 from rent. But this shouldn't come at an increased transport cost.
Reducing assistance to family to Sh10,000 will add your free float to Sh18,000. Support to family should reduce over time, except if you're the only "able" benefactor to parents and siblings. Unless you really need assistance to perform household chores, getting rid of the house help will free Sh12,000 and increase your free float to Sh30,000. You may outsource services like laundry and house cleaning on weekends at less than Sh1000 weekly.
You also need to eliminate chama savings. Doing this will increase your disposable cash to Sh35,000. This can enable you to borrow Sh1.5 million which will be repayable in 60 months and get you a plot in a suburban zone.
To achieve this, you need to use the 50:35:15 budgeting method which is best suited to your situation. Under this method, your monthly expenses may look as follows:
i). 50 percent to needs (Sh65,000): Rent 25,000, food and shopping 20,000, Transport fuel 10,000, electricity and water 3,000, Airtime/Internet 3,000, miscellaneous 4,000.
ii). 35 percent to savings and investments (Sh45,500): SACCO Sh5,000, MMF (emergency fund) Sh5,000, Fixed Income Fund Sh10,000, NSE stocks Sh10,000, MMF (sinking fund) Sh15,500.
iii). 15 percent to wants (Sh19,500) Entertainment Sh9,500, parents/siblings support Sh10,000.
Should you wish to take a loan, this budget model allows you to make adjustments on your investments and wants. Also, depending on how aggressively you would be willing to readjust to boost up your savings and or free float, there are items you can further cut down on. These may include entertainment which costs Sh9,500 monthly and Transport and fuel at Sh10,000 monthly.
Cutting these by Sh5,000 each would provide an extra Sh10,000 which can boost up your Sh5,000 monthly savings to Sh15,000. In order to know where you need to make cuts in your budget, keep track of every shilling you spend and constantly review your monthly budget at every pay cycle.
Your bank savings of Sh680,000 could actually earn a lot more if kept in a fixed income or money market fund. Money market funds typically return between 8 percent to 11 percent annually. While they aren't overly efficient as wealth creation tools, they are vital for short to medium term goal setting and emergency fund accumulation.
It is necessary to keep at least three months' equivalent of regular expenses in an MMF as it allows ready access. In your case, you need at least Sh400,000 accumulated and growing at about Sh4,000 monthly. This helps meet unexpected expenses like medical, car repairs, family celebrations, etc. Coupled with monthly savings at Sh5,000 monthly, 12 percent annual returns will push this over Sh800,000 by end year. This can fund your IVF (surrogacy) procedure. Children come with expenses too. If planning to retire at 50, you may need an education policy to cater for senior school and university costs.
Actively managed cash flow assets like unit trust funds - bond fund and special fund can help meet education costs through regular interests. Growth of assets through consistency and compounding interests will set you up for a comfortable retirement. Increasing income sources avails more cash to meet long term goals.
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.
If you have any money problems, send us an email at [email protected] leave your number for contact. Money questions will be answered on this column
