My name is Nelson. I am 26 years-old. I’m unmarried with no kids and have rented in Babadogo, Nairobi. I work in the CCTV control room of an Indian-owned company. I earn Sh12,000 net salary per month. Rent in Nairobi has become unbearable. I am wondering how I can manage to have a small plot and set up a structure that I can call my own even if it’s a mabati house. Is my dream in vain?
My salary breakdown is as follows:
Rent: Sh4,000
Food: Sh2,000
Chama: Sh1,000
Sacco: Sh1,500 (I have contributed for five months).
Upcountry: I send Sh1,000
Emergencies: Sh2,500
Chacha Nyaigoti Bichang’a, the founder of Chachanomics Limited, a mentorship and financial consultancy firm.
Devise a five-year financial plan (outlining your short-term, medium-term and long-term goals) that will guide you to achieve your dream of buying a small plot and building a house.
There are four things you need to do. Start by moving to a cheaper house at around Sh2,000. Use this balance to boost your Sacco savings to Sh3,500. This will enable you to save Sh42,000 in one year, and Sh126,000 in three years and Sh210,000 in five years. Assuming that your Sacco gives a dividend of at least 10 per cent you’ll earn Sh4,200, Sh12,600 and Sh21,000 in the first, third and fifth year respectively. The dividends can be ploughed back as additional savings which will in turn earn you more and increase your ability to acquire a higher loan.
They can equally help you plan for irregular expenses. By the fifth year, you can acquire a loan of about Sh620,000 which you can use to buy a small plot at your preferred place of residence and build a simple house using your Chama savings. However, this will definitely be far away from your place of work and may attract additional expenses like transport.
Secondly, you should consider increasing your Chama contributions to around Sh2,000. You need to reconsider the amount you send home based on whether it’s a necessary expense. Scale down the money you spend on emergencies to Sh1,500. Once you do this, you will be able to save Sh24,000 in a year which will earn you some dividends if your Chama lends out savings at interest. This money once received, can be used to upgrade your IT knowledge and skills on part time courses. This will increase your chances of getting a better-paying job.
Thirdly, you don’t have an emergency fund. The emergencies are perhaps the irregular expenses that crop up unexpectedly. Reduce this expense by channeling Sh1,000 to the Chama savings and the balance of Sh1,500 to an emergency kitty to cushion you against incurring unnecessary debt in case of illness, or any unfortunate occurrence.
If you open the emergency money in a money market fund earning you not less than 8 percent you’ll get Sh18,000 plus Sh780 compound interest (CI) (Sh 18,780) in a year, Sh54,000 plus Sh. 6,697 CI (Sh 60,697) in three years and Sh90,000 plus Sh10,175 CI (Sh110,175) in five years. You can use part of this emergency savings to help you construct a semi-permanent house once you have bought a plot using a Sacco loan.
Fourthly, you should consider starting a side hustle during your spare time or on weekends in order to earn you extra income. You can scan your neighbourhood and find out what service or goods people need the most. If your marital status changes within the five-year period, then your expenses (rent, food, household accessories) are likely to increase tremendously. It is important that you focus on your financial stability before you think of marriage.
Paul Muhami, financial and business advisor at SME Resource Centre
Although your rent takes a third of your income instead of less than a quarter (25 per cent), it is on the borderline and can be tolerated. This is especially since food plus rent is exactly 50 per cent of your income, which is good enough. It is commendable that you consistently save 12.5 percent of your income in a Sacco. This now needs to be raised to at least 20 percent or 2,500 per month. Does the Sh1,000 you save in your Chama earn interest? If the Chama is a merry-go-round with no interest earnings, you will need to redirect this amount to your Sacco savings to come up with Sh 2,500. Also, the Sh2,500 per month that you save for emergencies should not be money saved in a non-interest earning account. You should save it in a money market fund where your money will earn compound interest. Ideally, an emergency fund should be able to sustain you for three months without pay.
Consider slashing Sh1,000 from your emergency money and Sh500 from the amount you send upcountry to top up the Sh2,000 to your Sacco savings. This will bring your monthly Sacco contributions to Sh4,000. Saccos are very viable when it comes to funding development and acquisition of property. You will need to ensure your Sacco is legitimate and financially stable.
After aligning these finances, you will need to acknowledge that with your net income of Sh12,000, it may take longer to realise your goal. Leverage your young age. First, you need to start side hustles to boost your monthly income. These don’t have to be businesses requiring capital. They could be services you offer in your neighourhood during early mornings and evenings. For instance, Baba Ndogo and Lucky Summer areas are growing rapidly. Tap into their real estate sales and marketing. Once more income starts coming in, adopt the lease approach. With this approach, you will pool your funds at the Sacco then lease land where you can set up semi-permanent units, which you can rent out for additional passive income. Coupled with your Sacco savings, you may then get a Sacco development facility to acquire your own land, on which you can build more rental houses. This may take you up to five years to realise. This also means that you may have to shelve the goal of starting a family and concentrate on investments and passive compounded income. BY DAILY NATION