The Question by John: I’m a 24-year-old who recently started a remote-based job as a junior web developer, earning Sh30,000 per month. Since I live with my parents in Limuru, my expenses are very minimal. I have so far saved Sh120,000 in a money market account and I plan to invest at least half of my net salary (Sh13,500 per month) after taxes, though I’m open to saving or investing all available funds to maximize growth.
I’m seeking your expert advice on how and where to invest this money correctly in order to build long-term wealth as I mature more into adulthood and take on more adult responsibilities. I would also like to know what type of returns to expect. My goals are to grow my savings safely while exploring higher-return options as I gain experience.
I’m considering Saccos, Treasury bills, or unit trust funds but am unsure which are best for my situation, how they work, and what returns to expect. How do I invest my savings? What strategies and specific investment options would you recommend for someone with my income and risk tolerance?
The Answer as provided by Robert Ochieng’, the founder and investment advisor at Abojani Investments: The secret to financial security and wealth accumulation is risk and debt management, which entails being adequately medically insured, paying off short term loans and living within your means by establishing a budget and adhering to it.
John, you are at the right age to acquire more skills in web development and niche computer skills, then expand your expertise for more lucrative contracts. You also need to make short, medium-term and long-term plans. I commend you for setting the short-term goals of making a budget and building savings.
With estimated monthly net earnings of Sh27,000 you can do better with savings if you budget appropriately. Savings should start the very moment you earn an income. It is recommended that you save at least 10 percent of your income when you are starting work.
As your income increases, you should increase savings to between 15 percent to 20 percent of your income. In your case, to truly meet short term needs that may include having sufficient emergency funds covering at least 6 months of your living expenses, you need to be aggressive in this.
Assuming total personal expenses amount to half your salary income, you still have about Sh13,000 which is a good amount to grow savings and investments monthly. Joining a SACCO is recommended. Find one that accommodates freelancers and the wider informal sector – especially where your colleagues at work are, so that you are able to get guarantors for loans in future. Saving via SACCO inculcates a healthy habit and enhances discipline.
SACCO monthly savings of Sh5,000 will earn interests of Sh6,000 at 10 percent annual interest in the first year. Doing this consistently for three years will add up to Sh200,000 if interests earned are reinvested.
This will allow you up to 3X loan multiplier, thus a Sh600,000 loan for a purchase of an asset, say a plot; or scaling up your business. Repayments will average Sh12,500 for 72 months due to reducing balance formula. You will continue earning interests from the SACCO deposits as you service the six-year loan. You may reduce the monthly savings to Sh3000 to accommodate the loan repayments should circumstances get tough.
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You already have exposure to money market funds. You need an emergency fund that equals at least a year’s expenses. In your case, this could be at least Sh200,000. This can be built via a money market fund. An MMF is a collective investment scheme that pools funds from institutional and individual investors who all get an equal rate of return. Interests earned depend on the sums invested.
MMFs typically invest in short term instruments like fixed deposit accounts, treasury bills, commercial papers and short-term maturity bonds. The advantage of MMFs is liquidity of the funds, thus easy access at any time. Withdrawal orders are executed between 2-3 days. These are funds for short to medium term goals and also ‘parking’ funds with no immediate purposes. Bond funds also provide stable income rates at between 12-13 percent per annum.
Monthly savings of Sh8,000 in an MMF can accumulate over Sh300,000 in three years at about 10 percent annual interests. Alternative investments that are safe but have meaningful returns include treasury and infrastructure bonds.
With a Sh100,000 investment in an infrastructure bond paying 13 percent annual interests, you will receive Sh6,500 every six months for the duration of the bond. You could also invest in high yield NSE-listed dividend stocks. Some, like BAT and Standard Chartered Bank, have dividend yields of 15 percent and above, subject to share price fluctuations. You can also cash in on capital gains.
Learn about stocks, treasury bills, treasury and infrastructure bonds, high yield savings accounts and mutual funds with lower entry barriers. These allow you to focus on your career, seeking higher income prospects as you create passive income streams to boost your liquidity. The two – a salaried job and passive income sources – are not mutually exclusive.
Medium term goals like education planning, medical insurance, and long-term goals like home ownership, retirement planning, etc. are realities you will have to deal with. In particular, you are in the technological field that is evolving daily. Even as you save, prioritize acquisition and upgrading of your skillset to remain competitive. You can start off through online courses and accreditations even as you aim for formal academic pursuits.
A version of this question and answer was previously published in the Saturday Magazine. The Saturday Magazine is a publication of the Nation Media Group.
