My name is Edwin. I am a working student and make monthly deposits of Sh10,000 to Sh20,000 into Stima Sacco. I currently have about Sh200,000 in shares. I want to diversify my investments, so I plan to take a Sh100,000 loan, self-guaranteed due to my freelance employment. The loan attracts 12 percent interest on a reducing balance.
I aim to invest the loan to generate passive income, targeting an 18 percent return. However, I’m uncertain which ventures to pursue due to my time commitments. I also have an emergency fund that covers only one month of expenses. What practices would you recommend to help me save aggressively and invest wisely?
Dominic Karanja, financial planning and investments consultant.
At your age, likely in your 20s, you are in a prime position to build a strong financial foundation. Start by defining clear financial goals, which can be categorised as short-, medium- and long-term.
Short-term goals: Achievable within one year, such as building an emergency fund or paying off small debts.
Medium-term goals: Require one to five years, such as investing in education or purchasing a vehicle.
Long-term goals: Take over five years, like buying a home or retiring comfortably.
To achieve these goals, create and adhere to a budget. Allocate 50 percent of your income to needs, 30 percent to wants, and 20 percent to savings and investments. Track your expenses using tools like spreadsheets or budgeting apps and identify non-essential costs to cut.
Aim to build an emergency fund covering at least six months of living expenses. Automate transfers to this fund, allocate windfalls, and place the money in liquid, low-risk accounts like money market funds.
When borrowing, ensure it’s for investment, not consumption. Borrowing at 12 percent interest and investing for an 18 percent return (financial arbitrage) can be effective but requires thorough research to ensure sound investments.
For passive income, consider options such as:
Money market funds: Offer steady returns but currently range between 8–12 percent.
Government securities: Tax-free infrastructure bonds may yield higher returns.
Dividend-paying stocks and REITs: Explore these on the Nairobi Securities Exchange.
Peer-to-peer lending platforms: Higher risk but potential for greater returns.
To boost income, pursue side hustles, invest in education and skills, and explore multiple income streams. Surround yourself with financial mentors, attend workshops, and consult financial advisors.
Protect yourself by taking on an insurance package because unexpected events can derail your financial plans. Surround yourself with financial mentors who can inspire and guide you. Generally, educate yourself on personal finance/investment strategies by reading investment books and articles about personal finance.
Regularly review your budget and investments, adjusting strategies to stay aligned with your goals.
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.
