I am 30 years old, and I earn a net of Sh150,000 with monthly expenses of Sh95,000 (rent Sh30,000, fuel Sh20,000, airtime/data Sh5,000, food Sh20,000, miscellaneous Sh10,000 and black tax Sh10,000).
The remaining Sh55,000 I split as follows; Sacco savings Sh35,000 and travel and entertainment of Sh20,000. I need to save and buy a piece of land in Ngong worth Sh3 million in the next two years. How can I go about this?
Hi David, thank you for reaching out with this valid question.
Thank you for being vulnerable enough to expose us to how you always spend your monthly net earnings across various needs and wants. Key among these is the focused goal of owning a piece of land in Ngong worth Sh3 million within the next two years.
This shows great focus and determination which is commendable at your young age. Since you have not indicated how long you have been operating this way to accord us a rough estimate of how much you have saved in the Sacco to date, you will allow me to make the fair assumption that you are starting now.
Reviewing your spending patterns
From your monthly expenditure allocations, I have observed that up to 77 percent of your earnings go towards recurrent expenditure. This leaves only 23 percent for savings.
This is different from the budgeting models that we normally recommend. One of the models suggests a 50:30:20 allocation. This caps your recurrent expenditure at 50 percent and provides for savings and loan obligations at 30 percent and 20 percent respectively.
Where there is no leverage, then the allocation to loans can be taken by investments which is different from savings if we go by the WISE(R) model. This model posits that Wealth is preceded by Investments which are preceded by Savings which are in turn preceded by Earnings which sprout from business Relationships.
This simply means that the journey towards wealth accumulation begins with nurturing the Relationships that one has, to harness the benefits of social capital to allow Earning opportunities to sprout. These include the relationships you have been building with your clients (for revenue earnings) or the ones you have with your employer (for salary earnings).
A good budgeting tool will then enable you to manage the dance of your earnings in such a way that you can achieve some savings.
The dance of your spending patterns is therefore the most important because success is not determined by how much you earn, but rather how you manage the little that you earn.
If you were to achieve the goal of buying this targeted parcel within the said two years through pure savings, you would need to save Sh125,000 monthly to achieve the target of Sh3 million by the end of 24 months. Is this practical in your case? The interest rates in our fiscal environment in Kenya have been on a downward trend since October 2024.
The 91-Day Treasury bill has fallen from averages of 15.7 percent to the single-digit yields we have started witnessing of late, even at 9.5 percent a few weeks ago. This drop in interest rates is expected to continue its downward trend.
If the above savings are made in a money market fund yielding a very conservative interest rate of around nine percent , then you would need to save Sh120,751 monthly to achieve the same target with the help of some compounded interest. Such levels of savings may not be practical.
Assuming that you will approach your Sacco for a loan which will be three times your savings, then your current monthly saving of Sh35,000 will still not get you there. You will need to boost your Sacco monthly savings to about Sh44,000 to allow you to accumulate a savings of approximately Sh1 million in 24 months.
Borrowing a multiple of 3X your savings will afford you a loan of Sh3.1 million, which will be enough to cater for the cost of buying the piece of land plus a loan processing fee. Other land transaction charges can be taken care of with the extra surplus of approximately Sh73,000.
Costs to consider
The first aspect of cost that I would like you to consider is the cost of sacrificing some lifestyle luxuries. How do you raise your Sacco savings from the current Sh35,000 to Sh44,000? Your rent of Sh30,000 is currently 20 per cent of your earnings.
You may consider reducing this to around 16 per cent. (Sh24,000). You may also need to reconsider the 13 per cent allocation (Sh20,000) you have given to travel and entertainment, and bring this lower too to free up more money. These are the two potential areas of adjustment that you can start with.
I have noted that other significant issues of life remain conspicuously missing in your current budget, and I feel you need to consider them even as you chase this dream of land.
Currently, you do not have an allocation for a medical fund, general and life Insurance, emergency fund savings, or retirement savings.
Please factor these in as they are very important in your wealth accumulation journey.
The second aspect of cost that you should consider is the cost of borrowing. You shouldn’t call it interest against the loan amount because it is not in your interest. If you borrow Sh3.2 million at 12 percent from the Sacco, you will be required to pay back Sh45,452 monthly for the next 10 years (120 months).
I have picked this duration to bring the repayments closer to what you were saving monthly, so as not to distort your monthly disposable income in a significant way.
The cost of borrowing will be a staggering Sh2.2 million which is the total interest you will have paid as part of the Sh5.4 million total repayment amount. You need to deliberate whether this is a cost you will be willing to incur for a piece of land that will most likely remain idle for the same period of 10 years as you repay the loan assuming that your financial capabilities remain the same.
You may argue that the piece of land will have been appreciated, which prompts me to consider another aspect of cost.
The third aspect of cost that you should consider is the Opportunity Cost. Assuming that you have gone through the credit appraisal, and it has been confirmed that you can repay the above loan at Sh45,452 per month, but you decide to still “spend” that money monthly by saving it in a money market fund yielding a conservative return of just nine percent per annum.
Sh45,452 with have grown to Sh8.1 million after 120 months. This is a sure bet with the potential of you realising a much higher amount if the yields turn out to be higher than the nine percent we have used.
Is there a probability that the piece of land will have appreciated to levels that can significantly beat this? Maybe we should leave this to you to confirm, because we cannot claim that we know the exact location in Ngong where this dream piece of land is. Only you can tell us!
The writer is the author of the book DANCE WITH MY MONEY. Email: [email protected]
