My name is Rose. I am a single mum of two boys and one girl. I am in my early 30s and earn Sh80,000. Apart from Sh20,000 rent, I don't have a workable budget and I am always struggling to live within my means, pay all my bills, and still save money.
Please guide me on how to meet these expenses: Household shopping, food and groceries, water and electricity, drinking water, cooking gas, transport (matatu fare), school fees, airtime and internet, entertainment, grooming (clothes, shoes, hair & salon), gym, black tax (mum), mama fua (weekends), children’s Sunday treats and miscellaneous.
I desire to buy a vehicle by the end of next year and I don't know how to save for one. Please guide me.
Chacha Nyaigoti Bichang’a, a financial coach at Chachanomics Consulting Firm and the author of Mastering Your Money
From your financial report, you can only account for Sh20,000 (25 per cent), which you pay for rent. A colossal sum of Sh60,000 (75 per cent) cannot be accounted for. This clearly implies that you neither spend within a budget nor track your expenses. To manage your money effectively to achieve your financial goals, classify your expenses into needs and wants, and use the 50/30/20 budgeting guide to allocate money, reduce or cut off unnecessary expenses.
Start by classifying your expenses into needs and wants. Needs are necessary or essential expense items that you need for your survival or existence. They include rent, food and groceries, water and electricity, cooking gas, transport and school fees.
Wants are the discretionary expenses that you can do without. They include grooming, black tax, airtime and internet, entertainment, gym, Sunday treats and mama fua. Some of these items may be considered essential in our modern world like airtime and the internet. Therefore, your financial allocations (as per the proposed budget below) will depend on whether the expenses are necessary or not.
Using the 50/30/20 budgeting guide, allocate 50 per cent (Sh40,000) to necessary expenses, 30 per cent (Sh24,000) to savings and investment vehicles, and 20 per cent (Sh16,000) to discretionary expenses. This budgeting guide can be readjusted according to your financial goals. Considering your unique financial situation. I recommend that you adopt the 55/30/15 budgetary framework which makes a slight readjustment on the allocation for needs (increased by five per cent) and wants (decreased by five per cent) but retains the saving and investment component.
First, prioritise paying yourself first by allocating 30 per cent (Sh24,000) to savings for various purposes (automate them). Second, allocate about 55 per cent (Sh44,000) to your necessary expenses.
Rent should take the recommended average of 15 per cent (Sh12,000 scaled down from Sh20,000), household shopping, food and groceries 20 per cent (Sh16,000), transport 7.5 per cent (Sh6,000 translating to Sh200 per day), water and electricity 2.5 per cent (Sh2,000), drinking water 0.6 per cent (Sh500), cooking gas two per cent (Sh1,500), and school fees 7.5 per cent (Sh6,000 assuming all children go to school but adjust accordingly as per the needs of every child).
Third, channel 15 per cent (Sh12,000) as illustrated below: airtime and internet 2.5 per cent (Sh2,000), entertainment 1.9 per cent (Sh1,500), grooming 2.5 per cent (Sh2,000), black tax 2.5 per cent (Sh2,000), mama fua 1.3 per cent (Sh1,000), Gym 0.6 per cent (Sh500), Sunday treats 1.3 percent (Sh1,000) and miscellaneous 2.5 percent (Sh2,000).
To ensure the above budget works effectively, reduce or do away with some discretionary expenses so that you can allocate more money to necessary expenses to achieve your desired financial goals. Consider relocating to a cheaper house so that you can save about Sh8,000 that can, for instance, be used to establish an emergency kitty.
Grooming (clothes, shoes and salon) may not be done every month except for the salon. Go for a simple but classy hairdo. Buy clothes and shoes for yourself and children quarterly, especially good second-hand ones. The recommended amount for gym (Sh500) is little implying that this expense can be done away with. Consider going for routine workouts at least twice a week.
Spending Sh1,000 for mama fua may not be necessary because you can do it alone during weekends, as you also train the children to learn about general cleanliness. The entertainment expense can equally be eliminated.
On Sunday treats, you can give your children simple snacks like soda but not every Sunday. Black tax may be necessary especially sending a token to your parents and building social capital at the workplace and in the neighbourhood.
Establish a savings and investment scheme. This will form the basis of your progress or personal development as an employee without which you will be busy working for others without any commensurate returns. Save Sh10,000 (12.5 per cent) in a well-managed deposit taking Sacco to build a robust saving culture with multiple benefits (including BBF component, loan waiver and doubling of deposits/savings in case of your demise), easy access to dividends (that can be ploughed back for compound effect) and guarantees affordable loans for emergency, school fees and personal development or investment. In three years, you will have accumulated a principal sum of Sh360,000.
Using the 3X multiplier factor, you will qualify for a loan of at least Sh1m which you can use to buy a car or invest it in income-generating ventures. Channel Sh8,000 (10 per cent) to a compound interest earning unit trust such as the money market fund (MMF) for emergency purposes.
In three years, you will have accumulated about Sh334,972 based on 10 per cent compound interest (including the two per cent annual account management fees, and 15 per cent withholding tax calculated on the returns or interest earned.
Do not withdraw this money anyhow unless there is a life-threatening occurrence, or acute illness of your next of kin that surpasses the SHA payments or health insurance cover provided by your employer.
Consider taking a life cover of about Sh6,000 premium per month for about 15 years. Such a life cover can act as your retirement plan. Do a market survey and decide whether to take an endowment plan, whole life or term life insurance.
In case you take an endowment plan, you may expect a payout of around Sh1.2 million to Sh1.5 million with an annual return of five per cent. A whole life insurance payout could range from Sh900,000 to Sh1.2 million, depending on the insurer's bonuses and dividends. A term life insurance, on the other hand, does not accumulate cash value, so the payout would be the sum assured which might be Sh500,000 to Sh1 million.
A modest simple second-hand car would go for at least Sh800,000 and this amount cannot be realised in one year. This will definitely require you to seek a loan. Buying a car via a bank loan is considered a liability unless the car is able to earn you additional income. Assess the reasons behind your desire to own a car by asking yourself these questions: Am I influenced by my peers to fit in a certain socio-economic class? Will the car move me closer to becoming financially independent? Do I have other financial goals like investing, living in my home or building a business?
Explore ways to increase your income. Consider upgrading your professional skill set by enrolling for proficiency courses or further studies. Consider part-time jobs, freelancing, doing voluntary social work during weekends to prevent the urge to hang out for entertainment. Once you scan your environment and identify a part-time job or business you can do, it will go a long way in supplementing your regular salary and help you afford the lifestyle you need.
Above all, acquire personal financial literacy. Enrol in a personal financial management masterclass, hire a good finance coach and mentor to hold your hand as you navigate the concepts in personal financial education.
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