My name is Duncan, 40. I have a new job paying Sh850,000 where 7.5% pension is deducted and my employer matches the amount.
I have previously tried businesses that went down during Covid-19, leaving me with bad loans. My expenses are:
- No rent as I own my house
- House shopping: 20,000
- Electricity & Water: 15,000
- School fees: 250,000 per term
- Parents support: 20,000 per month
- Entertainment: 20,000 per month
- Fuel: 25,000 per month
- Phone, internet, TV: 12,000
- Sacco savings: 15,000
- Bank loan monthly repayment: 30,000, balance: Sh1 million
- Sacco loan monthly repayment: 30,000, balance: Sh1.6 million
- Car loan monthly repayment: 50,000, balance: Sh1.2 million
I would want to clear all loans soonest and focus on investments that won’t lose me money.
I also need to finish the house I live in. Finishing it will cost me around Sh 3 million.
I feel that I have not secured my future despite earning big money. Please assist me.
Inziani Khasiani, executive director at Klientele Kenya
Your gross salary of Sh850, 000 can result in two possible net amounts. One would be Sh850, 000 less pension deductions and assuming that all taxes have otherwise already been paid. This scenario will give you a net salary of Sh786, 250.
The second scenario is where on your salary figure, you deduct the known mandatory deductions of income tax, NHIF and NSSF to get a net salary of Sh. 529,350.
The total expenses in both cases will be Sh310, 333.30 after computing the school fees into a monthly figure of Sh83, 333.30. In the first scenario, the net salary of Sh786, 250 less expenses of Sh310, 333.30 will leave a credit balance of Sh475, 916.70.
In the second scenario, the net salary of Sh529, 350.00 will leave a credit balance of Sh219, 016.70. The first step towards clearing the loans is to increase the Sacco contributions and use the increased shares to borrow funds to clear the bank and car loans that are presumed more expensive.
This will be refinancing of the current loans with a new Sacco loan. The second step is to raise Sh3, 000, 000 to be used to finish the house.
The third step would be to repay the new Sacco loan in an accelerated manner as you use the head room created in the income position to start investing in assets that would be low risk and at the same time assure income for the long term.
The investment process does not have to wait for the two steps to be finished as recommended below. In the first scenario, an increase of the Sacco contribution to Sh170, 000 per month, leaving all other expenses “as is” will result in a credit balance of Sh64, 000.
Contributing Sh170, 000 for six months will bring shares of Sh1, 020, 000. Use this to borrow three times (Sh3,060,000). Meanwhile, loan repayments at previous rates will have continued.
The reduced loans are Sh820, 000 for the bank loan, Sh1, 420, 000 for the Sacco loan and Sh900, 000 for the car loan: a total of Sh3,140,000.
Thus, within six months, there is enough funds to repay all the loans and remain with one Sacco loan of Sh3,060,000.
Assuming a repayment at Sh70,000 for this new loan, there is headroom in the pay slip of Sh270,000.
If you commit Sh200,000 towards loan repayment [total of Sh270,000} the new loan will be fully repaid in less than 15 months. The same approach will be used on the second scenario where available funds would be lower and therefore, the payoff period would be longer.
The second step requires that you raise Sh3,000,000 to finish the dwelling house. Wait for 12 months for the new loan to be reduced before applying for Sacco loan towards this.
Meanwhile, I recommend a commitment of Sh50,000 per month immediately to start building a balanced low risk portfolio to achieve steady income in the long haul.
Invest in equities, treasury bonds, infrastructure bonds and money market funds. I also recommend this amount be enhanced by a minimum of Sh20,000 every six months.
At month 48 from now when you will be 45-years-old, the second Sacco loan would be cleared. Then the investment in the portfolio can be increased by Sh200,000 every six months.
At the end of 20 years, the amount invested would be Sh6,500,000. If the enhancement of Sh200,000 is done every three months, that figure will be near double. BY DAILY NATION