I’m Wilson, 29 years old. I earn $1,237. I pay five per cent withholding tax (WHT) every month because the company is foreign and not registered in the country. So, they use another partner company that is registered locally. They receive dollars and pay me in Kenyan shillings at the current rate. They deduct five per cent WHT from this amount each month. Last year I saved up to Sh1 million in MMF, but I used it for dowry and a small wedding. I regret that move.
Currently, I have a baby with the woman I married this year. He is two weeks old. I have saved Sh750,000 shares in a Sacco which I joined as soon as I got a job. I also have two money back life insurance policies worth Sh41,500. One cost me Sh16,500 and the other is Sh25,000 monthly. I’ll have to pay this for 16 years. I lived in a one-bedroom house for which I paid Sh11,000 per month. Recently, I moved to a two-bedroom house that costs Sh35,000 per month. I have been here for a month now. I also have a piece of land in Kamulu which I bought two years ago.
Two things are giving me a headache at the moment. One is that I want to build my house and the other is that I wanted to buy a car. I’m thinking of taking out a Sacco loan for both. How plausible is this? Should I do it? If not, how can I reorganise my money to save and achieve these goals in the shortest possible time?
Alex Kibebe, the founder of Rubiani Wealth Management Ltd and an investment consultant and business development coach, says:
Based on the details you have provided; your net income is $1,175.15 after deducting five per cent withholding tax.
Using the current exchange rate of about Sh125 to the dollar, your income should be about Sh146,000.
Your monthly expenses include Sh35,000 for rent and Sh41,500 for life insurance payments, leaving a balance of Sh76,500 for other expenses and savings.
In order to achieve your financial goals, I would advise you to work towards saving 20-30 per cent of your net income, which equates to Sh30,000 to Sh44,000.
You can consider keeping your other expenses at Sh36,000 to save Sh40,000. If you manage to do this, here are two options you can consider achieving your goals:
You could put the Sh40,000 savings into your Sacco account for 10 months. This will increase your share to Sh1,150,000.
You can then borrow three times the value of your shares, totalling Sh3,450,000. With this amount, you could use Sh2,700,000 to build a house on your land in Kamulu and use Sh700,000 to buy a secondhand car.
Assuming an interest rate of 12 per cent per annum and a repayment period of five years, your monthly repayments would be Sh75,000.
To meet the loan repayments, you could consider temporarily moving your family to a more affordable house with a rent of Sh10,000, preferably in Kamulu, which will also allow you to supervise the construction of your house more conveniently.
You would also need to reduce your other expenses by Sh10,000.
Together with your savings of Sh40,000, this would give you enough money to repay the loan. Once your house is built, you can adjust your budget as you will no longer be paying rent.
If this is not feasible for you, consider investing the Sh40,000 savings in a money market fund (MMF) account to raise funds to buy a car.
If you save for a year and a half, you will accumulate about Sh780,000, which you can use to buy a car. You can then continue to invest Sh40,000 in the MMF account for another two years, bringing your investment to about Sh1,100,000.
You can then take a loan of Sh1,600,000 from your Sacco and combine it with your MMF funds to have Sh2,700,000 to build your house.
Assuming the same interest rate and repayment period as above, your monthly repayment would be Sh35,600.
This strategy allows you to take out a loan with a repayment amount equivalent to your current rent, allowing you to continue investing towards other goals.
Once your house is built, I would advise you to continue investing in the MMF account to build up an emergency fund that will help you hedge against currency fluctuations, cover job loss and deal with other emergencies.
You could also consider investing in passive income opportunities and raising capital to start a family business.
In addition to the above investment advice, I would recommend that you consult an independent investment advisor (not an insurance agent) regarding your life insurance payout.
The amount of Sh41,500, which is about 30% of your net income, seems high and may need to be reassessed. I would also advise you to consult a tax advisor as the withholding tax may not be your final tax obligation.
If you have any money problems, email us at [email protected] and leave your contact number. Money questions will be answered on this column.
