My name is Caroline. I’m 29 years old and currently earn a salary of Sh140,000 (untaxed, as I work for an international organisation). I’m planning to buy a car for my 30th birthday, and I’m giving myself a year to budget for it. I don’t have a specific car in mind yet, but I’m looking for something affordable (up to Sh2 million) and easy to maintain.
At the moment, I don’t have a structured budget for my expenses. I’m a member of a Sacco and actively contribute to two MMFs (Sh9,000 in each of three accounts). My regular monthly expenses include Sh3,000 for internet, around Sh2,000 for electricity, and Sh25,000 for rent. My company pays for my weekly transport.
Other costs like shopping, dining out, and sending money to family vary from month to month, and I don’t track them. Could you advise me on the best way to budget for this car while still allowing some flexibility in my spending?
Dominic Karanja, a financial and investments consultant
Setting financial goals is one of the ways you can realise financial stability and success. It gives you clear-cut ideas and direction on how to manage, save, and invest your money efficiently. You can make a clear roadmap for your financial future by categorising your goals into short, intermediate, and long-term categories.
Short-term financial goals can be realised within a short period, usually within one year, and mostly address basic needs and building of a foundation for future financial stability.
Intermediate-term financial goals take one to five years to achieve and mostly require deeper financial commitment and planning. Long-term financial goals usually take more than five years, and they require a great deal of planning and commitment.
When you set and pursue short, intermediate, and long-term financial goals, you will have a concrete basis for the realisation of your financial dreams.
You currently earn Sh140,000 per month and your fixed expenses and savings total Sh57,000, leaving you with Sh83,000 to cover your variable expenses.
Budgeting and expense tracking should be part of your short-term financial goals. Begin by monitoring your spending to gain a clear understanding of how your income is allocated.
You can use a budgeting app or spreadsheet to track your daily expenditures. It is important to categorise your expenses into needs and wants to identify areas where you can reduce spending.
Needs are essential for your survival, while wants are desires or preferences, and cutting back on them won’t affect your basic living standards. Another key short-term goal you need to achieve is to establish an emergency fund equivalent to six months of your living expenses to handle unexpected costs.
Additionally, consider exploring ways to increase your income. If you’re comfortable taking on extra work, explore side hustle opportunities to boost your earnings and speed up your savings.
Setting aside a fixed amount each month to save for a new or used car should be part of your intermediate goals. Research various car models within your budget, considering factors such as fuel efficiency, maintenance, and insurance costs.
Opening a separate interest-earning savings account dedicated to your car purchase will help keep you focused and prevent the funds from being used elsewhere.
Calculate how much you can reasonably save each month and make consistent contributions to the account. To save for a Sh2 million car within a year you’d need to save Sh167,000 per month. However, based on your disposable income, you can start by contributing Sh50,000 to Sh60,000 per month.
By saving Sh50,000 every month, you would have accumulated Sh600,000 within 12 months. If saving Sh50,000 per month seems challenging, you could adjust your variable expenses or extend the timeline to 18 months by saving Sh45,000 monthly, which will provide you more flexibility.
Alternatively, you could explore financing options, such as taking a Sacco loan to cover the remaining amount. Saccos are an excellent source of development loans, offering up to three times your savings.
You will need to have saved at least Sh500,000 for you to access a Sacco loan to cover the deficit. A Sh1.4 million Sacco loan with an annual reducing balance interest rate of 12 percent over 36 months would result in a monthly payment of Sh46,500.
While saving for a car, consider other intermediate-term goals, such as building savings for a future mortgage down payment or investing in education and career growth.
Accumulating sufficient wealth through investments or passive income streams to support your lifestyle without depending on employment income should be one of your long-term financial objectives.
I recommend allocating at least 20 percent of your income toward savings and investments. There are multiple investment options available to help you reach your financial goals, but it’s crucial to consider your risk tolerance and the investment timeline when choosing where to invest.
Keep in mind that budgeting is a continuous process, and you should be ready to adjust your savings plan as your circumstances evolve.
Purchasing a car is a major commitment, so take your time to choose one that suits both your needs and budget. It may also be helpful to consult a financial advisor who can guide you in reaching your financial goals.
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.
