My name is Frank. I am 27. I currently earn Sh83,000 after statutory deductions and have bank savings of Sh4,250,000 and Sacco savings of Sh96,000. My expenses are as follows: Rent Sh15,000 (including power and water), food and groceries Sh16,000, internet and airtime Sh5,000, DStv Premium Sh11,000, mom and dad Sh10,000, personal and miscellaneous Sh10,000, girlfriend Sh10,000 and savings Sh5,000.
I am not very good at saving but have managed to save up from lumpsum bonuses at work. I have three goals, and I am wondering if I should take out a loan to achieve them faster—by the end of this year or at the latest, mid-next year. These goals are as follows:
1). To renovate my parents’ house. Their house is currently a two-bedroom mabati house. My aim is to set a stone block foundation with three courses on slab, then finish up three bedrooms and one living area with wood. I estimate the cost to be between Sh1 million and Sh1.5 million.
2). Build my own one-bedroom ‘simba’ structure on the same land where I can stay when I am not in Nairobi. I estimate the cost to be around Sh800,000.
3). Buy a mildly used local second-hand Toyota Axio at an estimated cost of between Sh750,000 and Sh850,000.
Robert Ochieng’, the founder and investment advisor at Abojani Investments.
Savings and investments are built from salary income, either through setting aside part of your income or taking a salary loan. There are expenses you can do away with to allow you to save at least 20 percent monthly.
Since you already have an allocation for the internet, you could cancel the DStv subscription to save Sh11,000. Additionally, check your allocation to food and groceries. Since you don't have a family, you could reduce this expense by Sh6,000 by buying cereals in bulk, especially when in season.
Encourage your parents to move towards self-financial independence. Explain your situation and the goals you seek to achieve on their behalf and bring their black tax from Sh10,000 to Sh6,000 to save Sh4,000.
Further, you have a huge budget for your girlfriend, which raises the question of financial dependency on you. Trim this downwards to Sh4,000 to save Sh6,000.
These two adjustments will give you an extra Sh10,000 for total savings of Sh27,000, exceeding 25 percent of your income. This could be improved to upwards of Sh30,000 depending on your examination of the Sh10,000 allocation that you have for personal and miscellaneous expenses. How exactly do you use this amount? Do you exhaust it every month? Check your personal and miscellaneous receipts for areas you can trim.
At your age, personal finance literacy cannot be overemphasised. Being good at saving would put you in a good position to realise your short- and medium-term goals sooner. For instance, saving Sh425,000 in an ordinary bank account does not earn you anything.
Money that sits idle is prone to unplanned spending and generally loses value to inflation. If you had kept it in a money market fund instead, you would earn at least Sh3,500 monthly.
In a year, this would accumulate to Sh467,000. If you directed the Sh5,000 savings to this fund, your money would have accumulated to over Sh530,000.
However, I would like you to note from the outset that money market funds, should you choose to go this route, are low-risk, low-return vehicles that protect your money from losing value to inflation. They are more of an investment stepping stone.
Although everyone's situation is different, financial advisors typically recommend the establishment of an emergency fund covering three to six months of monthly expenses. In your case, assuming a current average monthly spending of Sh55,000 after adjusting your budget, you would need between Sh165,000 and Sh330,000 tucked away in a money market fund. This is money you can access on short notice in the event of an emergency.
Assuming you allocate Sh5,000 monthly from the extra Sh27,000 (which will leave you with a balance of Sh22,000) you have salvaged from your budget cuts towards this fund, it would take you about three years to achieve this milestone. These savings will earn interest monthly. You may use these savings as a buffer for any unforeseen circumstances or later realise plans to build your own home.
Besides the money market fund, you may explore saving via a Sacco where you already have savings of Sh96,000, or invest in bonds indirectly through bond funds, or directly through the Treasury via the DhowCSD app.
Consider life insurance too, especially if you expect to have a family. Life insurance covers are cheap while you are young. Benefits can be used to educate your children, pay off a mortgage, or leave an inheritance.
For example, after doing thorough due diligence on a good Sacco—it is recommendable that you involve a professional financial consultant with a solid reputation—you could move Sh425,000 from your idle current bank account to a Sacco.
This will place your total Sacco savings at Sh521,000. Redirect your monthly budget trims of at least Sh22,000 to your Sacco to maximise dividend income.
This will help you build capital, earn passive income, and also open up financing avenues of up to three times your Sacco savings. For instance, even before you earn any dividends, your Sh22,000 budget cuts will accumulate to Sh264,000 in a calendar year.
At your age, the number one priority should be increasing income through learning skills that you can monetise, either at your current workplace or by starting a side hustle.
If your current girlfriend is the one you intend to marry, encourage her to develop her professional undertaking to avoid total dependency on you when you settle in together.
With combined incomes in the future, you should be able to meet joint short-, medium-, and long-term goals for financial prosperity. In a decade, at 37, your savings and investments will have paid off as you will reap from compounding interest. Be keen to delay gratification and reinvest your interest or dividends in your chosen investments.
To preserve your capital, I would recommend that you tackle your first two goals in phases. Since there is no emergency, you can accumulate and stockpile construction materials gradually at your parents’ home and renovate their house at a reasonable pace as your financial situation improves.
You may want to postpone building your simba as this is a project you can afford to put off until after you have gained financial independence. On acquiring a second-hand car, I would urge you to be clear on why you want to buy one. Is it for business or pleasure? Can you currently afford it? Do not take a loan to fund this purchase, especially where there is limited chance of converting it into an income-generating asset.
Remember, financial literacy is about having the knowledge, skills, and confidence to make financially responsible decisions. Knowledge refers to understanding personal finance and broader financial issues. It is acquired through practical experience.
If you have any money problems, or if you’d like advice on managing your finances, feel free to get in touch at [email protected].
