My name is Edith. I am 32 years old. My husband and I have an income of Sh460,000 per month.
Below is our budget: Rent Sh41,000, Food and groceries 28,000, tithe Sh40,000, edu plan Sh15,000, house girl 10,000, WiFi Sh3,000, airtime Sh2,000, car fuel Sh18,000, gas Sh3,000, shopping Sh20,000, mum and dad Sh20,000, miscellaneous Sh10,000, self-care Sh20,000, bank loan Sh40,000 (bought land someplace that's far from both workplace), fees Sh50,000 per month (child and my master’s).
We have two children, a six-year-old and six-month old. I desire to acquire land in Kikuyu, start investing, and build a three-bedroom bungalow. I started working two months ago, my husband has been the one shouldering all our expenses.
Our savings add up to Sh900,000 in the bank. We are not outgoing but do have creative ways of ensuring we are entertained.
Chacha Nyaigoti Bichang’a, a financial coach at Chachanomics Consulting Firm and the author of Mastering Your Money
Your total expenditure is Sh320,000 against a combined income of Sh460,000. This leaves you with a huge unaccounted-for balance of Sh140,000.
Perhaps the reason for this huge balance is because you started working two months ago and, with the entry of your first salary, your dual income has tremendously increased. Leverage on your dual income to create many passive income streams.
At 32, you are at a prime age of financial take off which is characterised by rapid financial growth once you make appropriate decisions.
To manage your finances prudently, review your financial lifestyle, set clear saving and investing goals, and acquire financial literacy as a couple.
1) Review your financial lifestyle
This is necessary because it will determine your true financial well-being as a couple. It will help you find out whether you are living within or beyond your means.
A financial lifestyle audit is anchored on three pillars: Calculating your net worth, tracking your money and spending with a budget.
i) Calculate your net worth: Your net worth refers to the number of months or years you can live without your active income or salary. To determine your net worth, subtract your total liabilities from your total assets.
That is, Net Worth = Total Assets - Total Liabilities. When calculating assets, consider only valuable items you own that are likely to appreciate in value or generate income.
A car, a home and household items are not reliable assets because they either depreciate in value or require money for maintenance.
From your financial breakdown, you do not seem to have valuable assets except the Sh900,000 bank savings. Liabilities are money you owe other people or financial institutions. You have one liability, that is a bank loan (whose actual figure is unknown) used to buy land away from your workplace.
When your liabilities outweigh the total assets (both fixed and current), you have a negative net worth which is very risky for it implies you are living beyond your means and can hardly survive even for a month. But when your total assets exceed the total liabilities, that means you have a positive net worth and it implies you are living within your means.
ii) Track your money: Record all your financial transactions daily. This can be done in a small booklet, a journal, mobile phone notebook or online app. By monitoring your expenses, you will know where every shilling goes, cut down on unnecessary expenses and draw an operational budget or spending plan. From your breakdown, a whopping Sh140,000 is unaccounted for partly because you neither track your expenses daily nor budget your money appropriately. Your miscellaneous (Sh10,000) expenses too may not be itemised or accounted for.
iii) Spend with a budget: To draw a balanced budget, you need to determine your total income and total expenses which is drawn from a breakdown of particular expense items.
Classify your expenses into three categories A, B and C.
From your breakdown, category A comprises very essential/highly necessary expenses such as food and grocery, gas, and rent.
Category B consists of essential/necessary expenses such as Edu plan, house girl, car fuel, shopping, school fees, bank loan, and tithe. You ought to include savings (Sacco or MMF) as a very necessary expense.
Category C includes non-essential expenses such as WiFi, airtime, black tax (mum and dad), self-care and miscellaneous expenses. It is important to note that shopping as an expense item is too general and ambiguous because some items under this vote-head may be very essential, essential or non-essential.
Whereas car fuel is an essential expense, efforts should be made to reduce it by using public transport at times or opting for car-pooling to save on fuel costs.
As much as tithe is essential for a practising Christian, it may not be very necessary on account of your financial situation. Its financial obligation is not as compelling as that of a bank loan which, if defaulted, can attract outstanding arrears. Consider reducing
it significantly and increase it when your income improves. As for the unnecessary expenses, consider doing away with some of them or reducing them greatly. This will leave you with more disposable income for saving and investing.
iv) Use the 50/30/20 budgeting guide to allocate your dual income as follows:
Spend 50 percent (Sh230,000) on Category A and B expenses, 30 percent (Sh138,000) on savings for various purposes, and 20 per cent (Sh92,000) on Category C expenses which are basically wants.
This guide is not cast in stone, you can readjust it, for instance, by downscaling Category C expenses to 10 per cent (Sh46,000) and some of Category B and C expenses.
2) Set clear saving and investing goals
Using the budgeting guide above, diversify your savings into vehicles such as Sacco (for affordable credit for investment purposes) and money market fund (MMF) for emergency and insurance policies.
Once you save 10 percent of your income (Sh46,000) in a well-managed Sacco, you will accumulate Sh1,656,000 to Sh2,760,000 in three to five years respectively without including annual dividends. Using the 3X multiplier factor, you can get a Sacco loan ranging from Sh4.9M to Sh8.3M in three to five years respectively. This money is enough to develop the land you bought by building rental units.
Alternatively, you can buy an apartment house in a middle-income estate which you can rent out to create more passive income.
Saving in a bank account earns you very little simple interest. Consider channelling the Sh900,000 bank savings to a MMF provider which will earn you at least 10 per cent compound interest, ensure your principal amount is secure and your money can be accessed within two working days.
Once you save 10 percent (46,000) monthly in an MMF firm together with the initial deposit of Sh900,000, you will realise Sh3,151,344 to Sh5,072,568 in three to five years respectively. This amount is far much more than the recommended six months' savings of your total monthly recurrent expenditures (about Sh2,760,000).
The surplus can be utilised for investment purposes like real estate or investing in government securities for passive income. Consider also investing 10 percent (Shs46,000) in a life policy.
Owing to the fact that you have an education plan of Sh15,000, you can procure a life policy (over 10-15 years) of Sh31,000 which will equally double up as your retirement plan.
3) Acquire financial literacy
As a couple, you need to attend financial empowerment workshops, seminars and coaching programmes so that you can read from the same page.
This will help you build financial fidelity and financial compatibility by aligning your financial goals with your beliefs, habits and actions about money and wealth creation.
Read personal financial books, articles, commentaries, watch videos and listen to audios on personal finance. Hire the services of a dependable financial coach to train and guide you on financial planning.
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
