My name is Jose. I earn Sh22,000 after all deductions. My expenditure is as follows: 3,201- education insurance policy, 3,000- shares in a Sacco, and Statutory deductions. Basically the Sh. 22,000 is what is left after the above deductions and from this 22,000 amount I spend as follows: 6,000 on food, 2,000 on airtime, 1,500 travelling, 4,000 emergency fund, and 1,500 pampers. I don’t pay rent. I remain with Sh7,000 of which I can’t explain how I use. Which investment can I undertake if I were to get a loan of like Sh500,000?
Rhina Namsia, the founder of The Acemt Consulting, a training and consultation company that provides financial planning and investment advisory.
From your breakdown, you seem to have a good savings habit. However, you lack clear goals to back up your finances. A goal helps you determine where to put your money, duration and timelines of investments, and potential returns on the investments and, or savings. If we go by the 50/30/20 rule, your money is well distributed within wants and needs which are covered under 50% and 30% respectively.
However, your remaining 20% is only in savings with no investments in the mix. Savings is not bad, but it only means you’re putting money aside and not allowing it to grow. You also need to track your expenses so closely for at least 3 months or as so to be aware how you utilize the Sh7,000 balance from your net income. This money could possibly be going to small expenses such as salon, personal care and a few other things that look insignificant but are quite important for your overall wellbeing.
Write every expense down no matter how small it is and contrast it to your allocations at the end of every month for at least three months. This will give you a clear picture on where each coin goes. Where do you save the Sh4,000 you set aside for emergencies? It will be prudent that you put it in a money market account so that it does not lie idle but earn some little interest as it grows. Money market may not make you rich but it is a great savings tool.
If you secure a Sh500,000 loan there are several investments you can opt for but what you need to understand first are the elements that inform you what investment is best for you at that particular time. These elements include:
Time horizon – this is the lifetime you intend to hold this investment without thinking of disposing it off. It can be long term, medium or short term. You need to know the time frame of when and if you need the capital back because different investment vehicles behave differently in different markets and some may require you to hold for long term before getting good returns or breaking even.
Return – this is the expected money you want on top of your capital. Again, different assets give different kinds of returns. Some give dividends annually, some interest monthly, annually etcetera, some rental income, etc. So, understand each asset class first and be aware of what you expect as a return.
Risk – understand the risks that come with investing in different asset classes as well as your own risk tolerance. Some investments are high risk and you need to be able to analyze if you can afford certain levels of risks. Assess your ability to repay the borrowed capital and the overall costs of the loan against the returns of investing the loan.
Goals – above all, determine your long term, medium, and short-term objectives from this investment. Pick an investment that aligns well with these goals.
With Sh500,000, you can invest in the following: shares, bonds, or a business. At the stock market currently, most counters are cheap and you can allocate about Sh. 250,000 and pick dividend paying stocks such as Safaricom, Stanchart, and Equity Bank. Before you do this, consult a profession to help you get a good mix. The other half can go into starting a business as a side hustle to give you an extra income.
This business should be in an area you’re familiar with or an area that will not put a strain on you to constantly top-up operational capital before you can break even. On the other hand, you may put the money in a bond market. Right now, a bond on Sh500,000 will fetch you 14% interest, but given the cost of the loan it may not make much sense having it in a bond. The only advantage with a bond is that it will guarantee you a regular interest income every 6 months of Sh35,000 and your capital is still safely guaranteed. BY DAILY NATION