Diversify your savings and investments to achieve the goal of buying a car and earning passive income.
I’ve always desired to own a car but I am unable to save for it. My budget is Sh700,000. My net salary is Sh45,000, and I have a side hustle that brings in Sh10,000. My expenses are as follows: Rent Sh13,000, Loan Sh10,000, Shopping Sh8,000, Black tax Sh4,000, Power and WiFi Sh2,000, Lunch Sh3,500, Personal Sh4,000, Chama Sh5,000. What am I doing wrong, because I don't have any savings. I live close to work and that is the cheapest and secure place around. Please guide me.
Chacha Nyaigoti Bichang’a, a financial coach at Chachanomics Consulting Firm and the author of Mastering Your Money
It is commendable that you have a side hustle. What you lack is financial discipline which is characterised by the absence of a clear budget and tracking systems.
The result is the unaccounted balance of Sh5,500, and lack of a structured saving and investing scheme that includes saving for emergencies and investment purposes. To address this challenge and achieve your financial goals, you need to review your expenditure, embrace the culture of financial discipline, have clear saving and investing goals, increase income from your side hustle and acquire financial literacy.
Start by cutting down on unnecessary expenses. Because you are living alone, reduce your shopping expenses from Sh8,000 (15 per cent) to Sh6,000 (10 per cent) and save Sh2,000.
Have a meal plan, do bulk shopping of foodstuffs and other consumables, and buy cheaper brands. Readjust the lunch expense from Sh3,500 to around Sh2,000 and save Sh1,500.
Carry packed lunch and avoid eating out. Reduce black tax from Sh4,000 to Sh2,000. Hold a candid conversation with family members who receive your token by telling them the need to reduce the amount due to your loan repayment and other emerging issues.
Your rent expense of Sh13,000 (24 per cent) is more than the recommended average of 15 percent (Sh8,250). Your place of residence, as you say, is near your place of work, more secure and the cheapest you can find, but you can still find a cheaper house as long as it does not inconvenience you in terms of transport costs.
You can save Sh3,000. Once you put these cost-cutting strategies in place, you will be able to save around Sh11,000, which can be channelled towards saving for a car.
Next, cultivate financial discipline. Spend your money prudently by drawing a budget. Track your money and determine where every shilling goes.
Once you do this for three consecutive months, you will establish a regular pattern of how much goes to every expense item on average. This will also help you come up with a realistic budget that mirrors your expenses and goals.
A budget will give you a blueprint to help you pay yourself first through savings and determine the financial targets for every vote head so that you do not overspend on essential and discretionary items.
Use the 50/30/20 budgeting guide. Channel 50 per cent (Sh27,500 instead of Sh38,500) towards essential items like rent, shopping, personal care, utilities and WiFi. Spend 30 per cent (Sh16,500) on savings for emergencies, and investment instead of the bare minimum of Sh5,000 (nine per cent).
Direct 20 per cent (Sh11,000) towards discretionary expenses such as black tax and other miscellaneous expenses. This guide is not cast in stone.
It can be readjusted to suit your financial needs and goals such as saving for a car. You can readjust 50 per cent downwards once you cut down on the expenses as suggested in the first strategy and redirect the money for wants toward loan repayment of Sh10,000 per month.
Have structured savings and investment goals. Evaluate whether the Chama contributions have any value addition in terms of generating profits by the end of the financial year.
If not, reduce the amount to around Sh2,000 and redirect the balance of Sh3,000 towards a well-managed Sacco or a compound interest-earning money market fund provider.
Diversify your savings and investment vehicles to achieve the goal of buying a car in five years and earning passive income. Assess the rationale for wanting to own a car.
Is it because of the fear of missing out or to fit into a certain socio-economic class? Is it that you want to generate another income stream?
Once you have identified the triggering factor, you will do an introspection and commit yourself to becoming financially independent rather than subscribing to a YOLO or FOMO lifestyle. Automate your savings and aim to save at least 30 per cent (Sh16,500) of your total income.
The first option would be to retain Chama contributions if the savings earn an interest of around 10 per cent at the end of the year.
The second is to reduce the contributions to around Sh2,000 if not reasonably profitable. The balance of Sh3,000 can be increased to Sh4,500 and saved or invested in a money market fund earning at least nine to 10 per cent on account of the current market rates.
This amount can be used as your emergency fund. You need a six-month emergency buffer of about Sh165,000 to Sh330,000. Channel the remaining Sh10,000 towards a reputable Sacco or another money market fund.
A Sacco would be preferable because it gives dividends of about 10 per cent based on the deposits, guarantees access to affordable credit facilities and anchors a robust saving culture. A money market fund vehicle, on the other hand, grants an investor easy access to the money, is suitable for emergencies, earns competitive returns and secures the principal deposits.
Suppose you save Sh10,000 in a MMF account earning a modest compound interest of 10 per cent a year, you will realise Sh418,715 in three years and Sh772,295 in five years.
The stated amounts are inclusive of the annual account management fees and withholding tax of 15 per cent on calculated interest earned.
These figures demonstrate the importance of developing a consistent saving culture and denying yourself some pleasures (delayed gratification). You can easily buy your car of Sh700,000 or thereabouts if you wait for about five years.
Acquire financial literacy. As the saying goes, "You cannot solve a problem with the same mind that created it." You have to upgrade your knowledge on personal financial management and wealth creation.
Enroll in a financial literacy masterclass to learn skills such as setting financial goals, budgeting, tracking your money, debt management, saving and investment, among others.
Hire a reliable financial coach who can hold you accountable and guide you through the process of financial planning. Guard against financial advisors whose aim is to sell you certain financial products that may not meet your holistic financial goals.
Explore ways to grow your side hustle. Rebrand and maximise your side hustle to make an extra Sh5,000 to Sh10,000 a month. Channel this income to your savings and investment pool.
Automate your money so that the proposed allocations are directed to their respective savings and investment vehicles the moment money hits your current account.
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
