My name is Michael and 33. I’m employed and earning a net salary of Sh32,500 per month. I am permanent and pensionable. I am married with three kids aged between four and six.
My wife runs a small-scale cereals shop for grains and a variety of flours. This shop makes a net profit of Sh15,000 per month. Together, we have saved Sh638,000 at the bank. We do not have any commercial loans currently, besides my Fuliza of Sh5,900 and her M-Shwari of Sh3,200.
Our expenses are divided into three – Rent, water and electricity Sh10,500; general household Sh10,000; grooming Sh4,000; pocket money Sh2,000.
I feel like my wife’s cereals business can make more if we expand it by raising more capital to buy and sell dry maize, wheat, beans in bulk, and buy a second-hand Toyota Hilux, Isuzu D-Max or Isuzu FRR for transportation. How can we achieve this without risking what we already have? How much would be ideal to borrow to achieve this? Can my payslip afford it? Please help us.
Alex Kibebe, founder of Rubiani Wealth Management Ltd and an investment consultant and business development coach
With a combined income of Sh47,500 per month and savings of Sh638,000, you have demonstrated commendable financial discipline. Your household expenses are also well controlled and you have avoided major commercial loans apart from small mobile loans.
It is advisable to first determine the purpose of your savings. Are you saving predominantly for business expansion, to secure your children’s education, for homeownership or for building passive income – such as building rentals? Having clear goals will help you manage your finances better and guide you on what risks you can take.
Additionally, instead of keeping all your savings in the bank, I would advise you to consider low-risk investment options that can generate returns while keeping your funds safe.
A money market fund (MMF), which currently offers interest rates of between nine percent and 14 percent per year would allow you to earn a return while maintaining liquidity (easy access to your funds). You can review the available MMF providers and identify one to save with.
You can also explore Treasury Bills which offer interest rates of seven percent to nine percent and are ideal for short-term savings, or Treasury Bonds for long-term savings currently yielding about 14 percent per year. These options are safe and will ensure your money works for you rather than sitting idle in a bank account.
In expanding your business, carefully assess the risks and potential returns. Purchasing a vehicle is a major financial decision, with a second-hand Toyota Hilux or Isuzu D-Max costing between Sh1.5 million and Sh3 million, while a used Isuzu FRR truck costs around Sh3 million.
If, for example, you take a loan of Sh2.5 million at an interest rate of 13 percent over four years – to finance the vehicle purchase and business expansion, your monthly repayment would be approximately Sh67,000. This is a heavy financial commitment that your current income cannot sustain unless your business profits grow significantly.
Rather than immediately committing to a vehicle purchase, I would advise you to first consider expanding one line of product — such as purchasing dry maize in bulk — and observe how profitable it is. Hiring a truck for transport instead of buying one will allow you to scale up without taking on a huge financial burden. You can finance such a scaled expansion from your savings or take on a small loan.
If the expansion proves successful and profits grow steadily, you can gradually add more products and when your business can comfortably sustain the loan repayment, you can then purchase a pickup or truck. Take caution not to be tempted to acquire the pickup or truck through the 90 to 100 percent financing option that many traders are going for.
Although this option comes with a grace period of around three months, these may not be adequate enough for your expanded business to generate enough revenue for operating capital and loan installments which can range at between Sh80,000 and Sh120,000.
Consider a more gradual expansion by steadily increasing your business stock and capacity over time by re-investing your business profits. This more cautious approach will allow your business to grow sustainably without taking on debt or straining your finances.
Regardless of your decision, ensure that you continue with your disciplined saving and investment habits.
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.
