My name is Benson, 24 and single. I am a boda boda rider based in Nakuru. On average, I save Sh500 every day on my phone after my daily expenses. By June 2024, I am considering buying a 300cc five-wheeler cargo motorcycle tuk-tuk to create a second income stream. I’d like to use it for the transportation of light cargo within Nakuru town or the sale and distribution of water. The cost of this tuktuk is between Sh250,000 and Sh450,000. So far, I have saved Sh86,500 on my phone. Options I am considering are taking a shylock loan or taking the tuktuk from a seller on hire purchase. I am not very sure if these are good decisions. Please advise.
Dominic Karanja, a financial and investments consultant
It is commendable that you have the discipline to make daily savings. However, your savings should be earning you some interest. Money saved in a mobile phone is easily accessible, posing the risk of temptation to use the money for unplanned expenses.
You need to explore alternative avenues for savings that also offer interest. Assuming you work a minimum of 24 days per month, your monthly savings amount to approximately Sh12,000. It is advisable to establish an emergency fund capable of covering at least six months of your expenses.
I recommend putting your emergency fund in a Money Market Fund (MMF). By saving Sh2,000 monthly in a MMF at a 10 per cent per annum rate, considering tax and management fees, you could accumulate at least Sh25,000 by the end of the year. An MMF presents a low-risk investment with guaranteed returns, ensuring the preservation of your capital.
Additionally, you can grow your portfolio through regular savings, and the funds remain easily accessible in case you need to make a withdrawal. This way, your savings not only stay secure but also have the potential to generate additional income through interest.
It's fantastic that you've established your personal financial goals, and you are exploring avenues to diversify your income streams. To make informed decisions, embark on market research for tuktuk, encompassing aspects such as prices, sellers and customer reviews.
Additionally, assess the potential income and the timeframe required to recoup your investment. While Shylock Loans have easy accessibility, they often come with high costs, short-term commitments, and inflexible repayment terms that can create financial strain.
On the other hand, a hire purchase arrangement offers more flexibility in payment terms. However, it comes with a higher overall cost compared to an upfront payment.
It is important to note that you’ll be bound by the seller's terms and conditions, and the logbook will only be transferred to your name upon full loan repayment. Consider these factors carefully as you weigh your financing options.
I recommend that you start saving with a Sacco. There are various Saccos that offer a range of savings, loan, and investment products specifically tailored for individuals in the informal sector. Consider joining one where you can get friends who can act as guarantors in case you need a loan.
Saccos are valuable sources of development loans, often offering loans up to three times your savings. However, it is essential that your income is sufficient to meet the monthly loan instalments.
By transferring your existing savings to a Sacco and consistently saving at least Sh10,000 per month, you could accumulate around Sh150,000 in six months. This amount will allow you to qualify for a loan of about Sh450,000 from the Sacco.
A Sh450,000 Sacco loan with an annual interest rate of 12 per cent on a reducing balance, payable over 36 months, will attract a monthly instalment of Sh15,000.
It is crucial to ensure that the additional income generated from the tuktuk is sufficient to cover the loan payments as well as any other financial obligations you may have, including funds to support the expansion of your transport business.
Borrowing from a Sacco carries advantages such as reasonable interest rates, flexible repayment terms, and, upon purchasing the tuktuk, the ownership will be transferred to you.
Consider capitalising your Sacco dividends by reinvesting them into deposits as this practice will not only enhance your borrowing capacity but also result in higher dividends in subsequent years.
