I am Wilson, 29 years old. I earn $1,237. I pay five percent withholding tax 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 percent withholding tax of five percent from that amount every month. Last year, I saved up to one million shillings in MMF, but I used it for a dowry and a small wedding. I regret that move.
Currently, I have a two-week-old child from the woman I married this year. I have saved Sh750,000 in shares of a charity I joined as soon as I got a job. I also have two life insurance policies worth Sh41,500. One cost me Sh16,500 and the other Sh25,000 monthly. I will have to pay this amount for 16 years. I lived in a one-bedroom house that I paid Sh11,000 monthly. Recently, I moved to a two-bedroom house that costs Sh35,000 monthly. I have been here for a month now. I also have a plot of land in Kamulu that I bought two years ago.
There are two things that are giving me a headache at the moment. The first is that I want to build my own house and the second is that I want to buy a car. I am thinking of getting a SACO loan for both. How reasonable is this? Should I do it? If not, how can I reorganize my finances to save for and achieve these goals in the shortest possible time?
Alex Kibibi, founder of Rubiani Wealth Management, investment advisor and business development coach, says:
Based on the details you provided, your net income is $1,175.15 after deducting the five percent withholding tax.
Using the current exchange rate of about 125 shillings to the dollar, your income should be about 146,000 shillings.
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.
To achieve your financial goals, I advise you to work on saving 20-30 percent of your net income, which is equivalent to 30,000 shillings to 44,000 shillings.
You may consider keeping your other expenses at Sh36,000 to save Sh40,000. If you can do this, here are two options you can consider to achieve your goals:
You can put your savings of 40,000 shillings in your Sacco account for 10 months. This will increase your stake to 1,150,000 shillings.
You can then borrow three times the value of your shares, a total of Sh3,450,000. With this amount, you can use Sh2,700,000 to build a house on your land in Kamulu and use Sh700,000 to buy a used car.
Assuming an interest rate of 12 percent per annum and a repayment period of five years, your monthly payments would be Sh75,000.
To cover the loan instalments, you may consider temporarily moving your family to a more expensive house with a rent of 10,000 shillings, preferably in Kamulu, which will also allow you to supervise the construction of your house more conveniently.
You will also need to reduce your other expenses by 10,000 shillings.
With your savings of 40,000 shillings, this will provide you with enough money to repay the loan. Once you have completed building your house, you can adjust your budget as you will no longer have to pay rent.
If this is not possible for you, consider investing your savings of Sh40,000 in a Money Market Fund (MMF) account to raise money 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 an MMF account for another two years, bringing your investment to about Sh1.1 million.
You can then get a loan of 1,600,000 shillings from your Sacco and combine it with your MMF funds to get 2,700,000 shillings to build your house.
Assuming the same interest rate and repayment period as above, your monthly payment would be Sh35,600.
This strategy allows you to obtain a loan with a repayment amount equal to your current rent, allowing you to continue investing to achieve other goals.
Once you have your home built, I recommend you continue investing in an MMF account to build an emergency fund that will help you hedge against currency fluctuations, cover job loss and deal with other emergencies.
You can also consider investing in passive income opportunities and raising capital to start a family business.
In addition to the investment advice above, I recommend that you consult an independent investment advisor (not an insurance agent) regarding your life insurance payout.
The amount of 41,500 shillings, 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 liability.
If you have any financial issues, email us at (email protected) and leave your phone number. Financial questions will be answered in this column.
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