My name is Caroline. I am 30 years old. My net salary is Sh100,000. I want to buy a car by February 2025. The car's budget is Sh1.4 million. I have saved Sh250,000 in MMF. I am also receiving an additional 300,000 from a family investment. I recently joined a Sacco with deposits of 10,000. My monthly expenses are Sh30,000. I need your advice on;
1). How to finance the car: should I take asset financing via a bank or apply for Sacco loan?
2). Saving for an emergency fund through an MMF: how much should I save into this and what returns should I expect?
3). Manage my salary in a better way to raise capital for investment.
Chacha Nyaigoti Bichang’a, a financial coach at Chachanomics Consulting Firm and the author of Mastering Your Money.
From your breakdown, you have itemised only two expense items: Sacco deposits of Sh10,000 and a general figure of monthly expenses of Sh30,000 which totals to Sh40,000. A balance of Sh60,000 is unaccounted for. To effectively manage your salary, consider the following guidelines.
1). Work with a budget: A budget helps you plan your money by determining your expenses and allocating funds to them. In this case, before you spend, how much goes into savings, necessary and unnecessary expenses.
It will help you to cut down on unnecessary expenses and take good control of your money. Your financial report does not reveal specifics about key expense items like food, rent, transport, medical care etc.
Besides, you cannot account for 60 percent of your net salary. This means that you neither have a spending plan nor track your money on a daily, and weekly basis so that you can prepare a monthly financial statement.
It can be suspected that you are caught up in the trap of the monthly salary which is able to meet your needs effortlessly, and hence gives you no reason to plan. You need to change tact and understand that wealth creation is not necessarily about the amount of the money but the most effective utilization of the available money.
Use the 50/30/20 budgeting rule to help you manage your money better. Before you start spending, pay yourself first by allocating 30 percent (Sh30,000) of your income to savings for various purposes like emergency, investment and retirement. Then allocate 50 percent (Sh50,000) to necessary expenses such as foodstuffs, rent, transport, medical care etc.
Channel the remaining 20 percent (Sh20,000) to wants or unnecessary expenses such as cable TV, internet, fashion and trends. However, this budgeting rule is not cast in stone but it is flexible. You can readjust it to suit your interests, values and aspirations.
2). Establish a saving and investment scheme: You are saving Sh10,000 in a Sacco which is a good step. It is not clear how much you are depositing in your MMF account which stands at Sh250,000. To be on a better financial trajectory, it is recommended that you save 30 percent (Sh30,000).
Now that you are saving Sh10,000 in a Sacco, ensure you save another Sh10,000 in MMF and spend Sh10,000 on an endowment fund or life policy for a period of 10 years and above. Such an endowment fund will act as your retirement plan that will guarantee you partial maturity or lumpsum payment at maturity.
The saving and investment plan will help you raise the much-needed capital for investments and passive income – especially in the years to come when you start considering retirement and want to maintain a particular lifestyle.
Suppose you save Sh10,000 in a MMF with an existing deposit of Sh250,000, you will realise Sh810,644 inclusive of withholding tax and annual account management fee.
MMF savings have multiple benefits: the principal amount is secure, easily accessible especially during any emergency and earns modest returns at an average of 13 percent currently.
On the other hand, invest the windfall of Sh300,000 from family investment in government securities particularly infrastructure bond which would earn you a tax-free coupon of around 16 percent. This will give a return of Sh48,000 a year or Sh24,000 after every six months.
3). Set financial goals: At 30 years of age, you are in a period of financial take off characterised by a stable job, settling in marriage and engaging in robust saving and investing schemes. It is, therefore, important to set SMARTER financial goals.
The goals should range from short-term (3-12 months) to medium-term (2 - 5 years) and long-term (5-10 years or beyond). For example, buying a car may not be a sound short-term goal but a medium-term one that requires you to effectively manage your money better by focusing more on saving and investing rather than on consumption or bad debts. Taking a life policy is an example of a long-term goal that would stretch to 10 years or beyond.
4). Financing options for a car: It is important to review the underlying reasons for wanting to buy a car by February 2025. What is triggering you to buy a car so urgently? Is it for prestige, convenience or to show off? Is it really possible to buy a car without a good financial plan or stable sources of income? Will the car be an asset that generates cash flow or a liability that consumes your hard-earned money?
Upon introspection and a critical review, you will get genuine well-thought-out answers to the reflective questions that will inform the need to delay the urgency to buy a car by going for a loan that will deplete your disposable income for savings and investments.
Alternatively, if you decide to buy it in the short-term as an income generating asset, you may consider going for a Sacco loan if you have enough deposits that can guarantee you about Sh1.5 million or thereabouts.
A Sacco loan has lower interest rates than a bank loan, is payable at a reducing balance, and is based on pro-rata using the 3X multiplier factor. You have to decide whether you can afford a brand-new car or a second-hand model.
The windfall from the family investment can be used as a down payment. However, be honest to yourself on why you have so much need for this expense that you are considering taking loans to finance it.
5). Explore opportunities for earning extra income: Instead of relying on a formal job all the time, scan your immediate environment and find out what you can do during your spare time in order to make more money.
Use your free time to learn special hands-on skills like financial education, how to earn money online and other soft skills in line with your interests and hobbies. Your earning capacity alone points to an impressive resume that can be harnessed to produce multiple sources of income.
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.