I am 24 years old. I earn a net salary of Sh44,000. My expenses are as follows: Rent and electricity Sh10,000, Transport Sh3,000, Groceries Sh5,000, Shopping Sh3,000, laundry Sh1,000, data and airtime Sh2,000, savings Sh20,000.
I live alone and have no dependents, bar the occasional relative or friend asking for money. I have a Helb loan of Sh250, 000 which I pay Sh4,000 monthly (deducted from gross salary). This Helb loan is my only debt, and it stresses me so much because it doesn't seem to reduce.
I have an MMF of Sh200, 000, which I contribute Sh20,000 monthly. I also have a bond set to mature in 2036 for Sh200, 000. My goal is wealth creation. I am not so keen on buying houses and land, at least not in the next five years.
I want to have enough money to help my relatives at home. Though not poor, we are not doing well at home and could use some more money. I am the only one at home with formal employment and a steady source of income for now, and I need to find another source of money. I am so focused on saving that I feel I don't have enough breathing space to live my life. I have not furnished my house with appliances that would make my life easier, like a fridge, dinner set, oven, water dispenser, which I feel I should have. I am barely a spender and have always tracked my expenses.
I am considering taking out all the money I have to pay off my Helb loan. I need help to save while still allowing myself some luxuries because I work so hard. Buying these things makes me feel like I am wasting money, like an emergency would pop up and I would be inadequately prepared because I bought a Sh30,000 oven with money I should have put into savings. Also, can I take on additional investments? Tabitha.
Chacha Nyaigoti Bichang’a, a financial coach at Chachanomics Consulting Firm and the author of Mastering Your Money
Your total expenditure is Sh44,000, which equals your net salary. This leaves you with a nil balance, which is not good because you have not factored in miscellaneous or discretionary expenses, such as the money you spend on your parents.
At 24, you are a very productive youngster who is already earning a regular salary, unlike many of your peers who are jobless and unable to sustain themselves.
There is an imperative need to leverage your youthful age and utilise your salary more prudently to be financially independent and create wealth in your 30s and 40s.
Adopt smart financial habits such as reviewing your financial position, living within your means, tracking your money, spending with a budget, setting SMARTER financial goals, diversifying your savings and investments, enrolling for financial literacy lessons and starting a side hustle.
1) Review your financial position. Take a reality check on how you spend your money and the expenses that consume more money unnecessarily to cut down on over-expenditure.
Ask yourself these fundamental questions: How much do I spend per day, per week and per month? How much do I need to save and invest in various asset classes? Do I have an emergency savings equivalent to three to six months of my upkeep expenses? What kind of debts do I have and how do I clear them? How can I borrow responsibly to generate passive income? These questions will help put your financial position in proper perspective. They will help you create a blueprint or framework that aligns your expenditure with your financial goals.
2) Live within your means. Once you have done an in-depth audit of your finances, you will identify the expenses that consume more money than is necessary. For example, you are spending Sh10,000 on rent which translates to 22 per cent of your net income which is far more than the recommended average of 15 per cent (Sh6,600).
Consider relocating to a cheaper house where you pay within the range of Sh5,000 to Sh7,000. By doing so, you will save between Sh3,000 and Sh5,000. The rest of the expenses are commendable and within the required range but still you can do bulk shopping of groceries when in season and save Sh1,000 or Sh2,000. Cumulatively, you are spending Sh8,000 on both groceries and shopping (18 per cent).
Monitor your expenditure on data and airtime so that you can save Sh500 to Sh1,000. On laundry, you can do the washing alone instead of paying Sh1,000 for the same. You are saving Sh20,000 (45 per cent) which is highly remarkable and a smart money habit. You have surpassed the recommended average of 10 per cent to 30 per cent.
Once you review your expenditure and cut down on unnecessary expenditure, you will save between Sh7,500 and Sh10,000. This disposable sum can be channelled towards a saving and investment vehicle that earns compound interest such as MMF.
3) Track your money and spend with a budget. By monitoring where every shilling goes and the exact amount each expense item consumes per day, week, and month, you will be able to do away with bad financial practices such as impulse buying or spending without a plan.
Resist the urge to spend on luxuries based on the premise that you work very hard and thus you need to massage your ego. Such an impoverishing money habit or belief is anchored on the YOLO (You Only Live Once) or FOMO (Fear of Missing Out) lifestyle that many youngsters subscribe to.
You cannot have your cake and eat it at the same time. Use the 50/30/20 rule to allocate your money to various expense items. Spend 50 per cent (Sh22,000) on necessary expenses such as rent, transport, shopping, groceries, data and airtime, and laundry.
Channel 30 per cent (Sh13,200) to savings for various purposes and 20 per cent (Sh8,800) on discretionary expenses or wants such as black tax, personal grooming, fashion and trends. You can, however, readjust this budgeting guide to suit your financial goals. For instance, you can reduce on wants by 10 per cent and necessary expenses by the same percentage and channel the surplus to saving and investment vehicles to create sustainable wealth in 10 years. You will end up with this formula: 40/50/10. This implies that you will save 50 per cent (22,000) something that you have almost achieved by saving Sh20,000 (45 per cent).
4) Set SMARTER financial goals: Without clear-cut financial goals, you will be like a ship that has left the harbour without any sense of direction. Financial goals help to clarify your purpose in life and what you want to achieve in the long run.
They spell out specific action steps to be taken to realise your dream goal of creating wealth and living an abundant lifestyle. The goals should be SMARTER, that is, Specific, Measurable, Achievable and Realistic or Recordable, Time-bound, Evaluable and Result-oriented.
They should range from short-term (three to 12 months), to medium-term (two to five years) and long-term (five years and beyond). Short-term goals may include reviewing your financial expenditure, moving to a cheaper house, tracking your money, spending with a budget and diversifying your savings.
One of the robust medium-term goals would be to save Sh10,000 per month in a reputable Sacco and ploughing back the dividends so that in three to five years, you will have accumulated Sh436,920 and Sh805,873 which is inclusive of withholding tax.
When you plough back your dividends, you will benefit from the compounding effect and your savings will increase exponentially. Another medium-term goal would be to clear your Helb loan using MMF savings to avoid unnecessary stress.
In five years, you can use the Sacco savings to invest in real estate by buying a plot in a town of your choice and start building rental houses in manageable phases. Alternatively, you can invest in treasury bonds that can earn you reliable passive income.
5) Diversify your savings and investments. You do not have savings for emergencies, which is equivalent to at least six months of your recurrent monthly expenditure (Sh264,000). Seemingly, you are saving Sh20,000 in a money market fund (MMF), thereby accumulating Sh200,000 to date.
Diversify your savings in a manner that allows you to have an emergency fund, an investment and a retirement fund. Channel at least Sh10,000 to a reputable Sacco for investment purposes, Sh10,000 to a MMF for emergency purposes, and about Sh5,000 towards procuring a life policy.
If you invest Shs10,000 to your preferred MMF account, you will accumulate Sh690,936 in three years and Sh1,109,886 in five years (inclusive of 15 per cent withholding tax and two per cent annual account management fees) using the Sh200,000 as the initial investment.
This amount will give you a sound financial head start in case of any unforeseen eventualities. Alternatively, you can redeem some of your savings and use them to clear the Helb loan and channel more monthly deductions towards clearing the loan.
You can equally use part of the funds to invest in real estate or in treasury bonds especially the tax-exempt infrastructure bond. Remember, by having more bonds, you will earn more passive income that may translate to monthly income.
6) Enroll in a financial literacy masterclass. As a youngster, you need to undergo a financial paradigm shift on how to spend or relate with your money. You need to learn valuable personal finance skills – the difference between good and bad debts, demystify the concept of debt, how to save and invest in viable vehicles, spend with a budget, ring-fence your assets, write a will, among others.
Besides, read transformative self-help books on personal finance, personal finance solution resources such as the Saturday Magazine’s personal finance section, watch financial videos and listen to audios. Above all, hire a good finance coach to take you through the personal finance journey of planning and execution.
7) Start a side hustle. Relying on one regular income is not a panacea for creating real wealth. You need to identify your passion, upscale your skill set and monetise your natural talents or special gifts.
Carry out a self-assessment test to establish where your innate talents, interests and passions lie. Use your free time to learn an invaluable skill online or to build on your identified passion in cooking, embroidery, cartography, video-editing, writing blogs, sales and marketing various items online. Once you leverage your spare time, you will definitely create an additional income stream to supplement your current one.
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.
