My name is Petronila. I’m 30 and currently earning Sh90,000 after deductions. My recurring expenses are as follows: Sh10,000 Sacco deposit, Sh30,000 MMF, Sh20,000 Food and transport, Sh2,000 internet, Sh6,500 chama, Sh5,000 shopping, Sh2,000 water, Sh1,000 airtime, Sh3,000 for mum's salon. I have 700,000 in Sacco deposits and 480,000 in the MMF. I don't have children.
I live alone and currently I'm not paying rent. I am done with my studies for now as I met my master's goal. I want to focus on financial success. I have been working for six years and I have no assets or anything to show. My current goal is to buy a car without loans, have passive income and own a home in the outskirts of Nairobi. How do I reach these goals?
Josephine Murage, an investment banker and a financial planning consultant.
From the breakdown of budget and allocations, your total monthly spending comes in at Sh79,500, leaving Sh10,500 unaccounted for.
You need to track where this money is going by analysing your expenditure throughout the month. Note that if this amount has been unaccounted for a full year, you have at least Sh126,000 which you never account for annually.
Your budgeting is nonetheless almost well balanced, with a good bias towards savings. It is commendable that you have allocated Sh40,000 to savings, which is nearly 50 percent of your net earnings.
I would however urge you to balance the allocations, especially in the face of decreasing returns on Money Market Funds. It is important that you understand that by their virtue of being low risk, their returns are correspondingly low.
This means that whereas MMFs are a good saving option, their primary aim is to prevent your money from losing to inflation, and earn you some compounded interest as you ready yourself for more aggressive investments.
This is one of the reasons why MMFs are a good option for emergency funds. On the other hand, though, Sacco savings have a slight advantage due to their higher dividend return rates, and their ability to avail credit at a rate of 3X your total savings.
The common recommendation for an emergency fund is usually six months’ worth of the recurrent expenditures. With your total expenses at Sh79,500, your emergency fund needs to be around Sh477,000.
Assuming your MMF is your emergency fund, it can be safe to say that you have crossed this bridge with your Sh480,000 MMF kitty and can, therefore, comfortably diversify your savings.
You can opt to make a one-time additional contribution of Sh20,000 to bring your operating MMF investment to Sh500,000 from which you will continue to earn daily compounded interest. In 24 months, this money will have grown to around Sh610,000 with an annual estimated rate of return of about 10 percent.
You may then consider topping up your Sacco contributions to Sh20,000 per month. Automate this contribution by making a standing order so that this money is directly sent to your account once your net pay enters your checking account.
You will then remain with a disposable income of Sh20,000 from your savings. Since you have already successfully experimented with Sacco and MMF savings, I would encourage you to broaden your scope by targeting strategic dividend earning stocks from stable companies with a performance track record and fundamentally stable future prospects at the Nairobi Securities Exchange.
There are a few of these in the banking segment that you can tap into. However, being a rookie in the trade of stocks, I would encourage you to consult professional investment analysts, and possibly take a Masterclass to learn and understand how investing in stocks works.
A Masterclass may cost you less than Sh5,000 but reward you with knowledge that could be a source of extra passive income and growing stock value. The Sh20,000 you have left can start going into these investments.
Since you do not want to have money lying idle as you build an investment kitty for stock investments, you may have the option of opening a second MMF from which you can build your fund – given the MMF’s ease of withdrawal.
In liaison with your securities investment consultant, you may evaluate if Sh20,000 can start you off on the counters you end up targeting. If not, you may consider investing in intervals of about five months at Sh100,000 per investment.
This should get you ready for bolder investments in medium to long term investments such as tax-free infrastructure bonds which are a little more capital intensive for more passive income.
Instead of sending your mom black tax every month, you may want to encourage her towards self-reliance. This can be by way of founding a small project at home, which you can start with the Sh10,500 that is unaccounted for.
This project can be as small as a layer’s chicken poultry business, which you can grow over a period of six months. Alternatively, if your mother is economically active and the money you send her is more of a gift, you may want to consider creating a health buffer for yourself by taking on an additional health insurance scheme that you can rely on in the event of sickness, besides the national social health scheme. For example, you can allocate Sh5,000 out of the Sh10,500 to this policy, and also set your parents on their own health policy with the remaining Sh5,000.
On your two remaining goals of a house and a car, I would encourage you to postpone the acquisition of a vehicle at this moment until after your passive income has stabilised. For example, you can push this goal until around age 35.
This will pave the way for you to save, invest, diversify investments, and have regular passive income coming in at least bi-annually. It is also important to note that a vehicle will come with extra costs on top of your current monthly budget – and may require you to readjust allocations such as savings and investments to accommodate the vehicle maintenance costs.
In the place of the car, you can set the acquisition of a prime parcel of land in Nairobi’s metropolitan area as your medium goal. Scout around to see what the selling prices are for what you are looking for.
There are also reputable land selling companies that offer options to pay in instalments. However, you should do your due diligence on the prevailing total cost of similar parcels vis a vis the price offered and the interest charged.
With your Master’s in your purse, you stand a better chance of getting promoted at your workplace or even finding professional side hustles. Make these a priority to create an extra source of income and end your current dependency on one income stream.
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.
