Tuesday, February 27, 2024

I earn Sh. 850,000 monthly but I am stuck with loans and I only save Sh. 15,000 

My name is Duncan. I am 40. I have a new job paying Sh. 850,000. I am deducted 7.5% pension with my employer matching the same. I have previously tried businesses that went down during Covid and left me with bad loans. My expenses are as below:

  • No rent as I own my house
  • House shopping: 20,000
  • Electricity & Water: 15,000
  • School fees: 250,000 per term
  • Parents support: 20,000 per month
  • Entertainment: 20,000 per month
  • Fuel: 25,000 per month
  • Phone, internet, TV: 12,000
  • Sacco savings: 15,000
  • Bank loan paying 30,000 per month with balance at Sh. 1 million
  • Sacco loan paying 30,000 per month with balance at Sh. 1.6 million
  • Car loan paying 50,000 per month with balance at Sh. 1.2 million

I would want to clear all loans soonest and focus on investments that won’t lose me money. I also need to finish the house I live in. Finishing will cost me around Sh. 3 million. I feel that I have not secured my future despite earning big money. Please assist me.

Inziani Khasiani, the executive director at Klientele Kenya

Your gross salary of Sh. 850,000 can result in two possible net amounts. One would be Sh. 850,000 less pension deductions and assuming that all taxes have otherwise already been paid. This scenario will give you a net salary of Sh. 786,250.

The second scenario is where on your salary figure you deduct the known mandatory deductions of income tax, NHIF and NSSF to get a net salary of Sh. 529,350. The total expenses in both cases will be Sh. 310,333.30 after computing the school fees into a monthly figure of Sh. 83,333.30.

In the first scenario the net salary of Sh. 786,250 less expenses of Sh. 310,333.30 will leave you with a credit balance of Sh. 475,916.70. In the second scenario, the net salary of Sh. 529,350.00 will leave you with a credit balance of Sh. 219,016.70.

The first step towards clearing the loans is to increase the Sacco contributions and use the increased shares to borrow and use the borrowed funds to clear the bank and car loans that are presumed more expensive. This will be refinancing of the current loans with a new sacco loan. The second step is to raise Sh. 3,000,000 to be used to finish the house.

The third step would be to repay the new Sacco loan in an accelerated manner as you use the head room created in the income position to start investing in assets that would be low risk and at the same time assure income for the long term.

The investment process does not have to wait for the two steps to be finished as recommended below. In the first scenario, an increase of the Sacco contribution to Sh. 170,000 per month, leaving all other expenses “as is” will result in a credit balance of Sh. 64,000.

Contributing Sh. 170,000 for six months will bring shares of Sh. 1,020,000. Using this to borrow three times will give Sh. 3,060,000.00. In the meantime, loan repayments at previous rates would have continued. The reduced loans are Sh. 820,000 for the bank loan, Sh. 1,420,000 for the Sacco loan and Sh. 900,000.00 for the car loan: a total of Sh. 3,140,000.

Thus, within six months, there is enough funds to repay all the loans and remain with one Sacco loan of Sh. 3,060,000. Assuming a repayment at Sh. 70,000 for this new Sacco loan, there is headroom in the pay slip of Sh. 270,000. If you commit Sh. 200,000 towards loan repayment [total of Sh. 270,000], the new loan will be fully repaid within less than 15 months.

The same approach will be used on the second scenario where available funds would be lower and therefore the payoff period would be longer. The second step requires that you raise Sh. 3,000,000 to finish the dwelling house. Wait for twelve months for the new loan to be reduced before applying for Sacco loan towards this.

My hubby and I want to quit 500k salary jobs to relocate to Canada or Australia

Meanwhile, I recommend a commitment of Sh. 50,000 per month immediately to start building a balanced low risk portfolio to achieve steady income in the long haul. The areas to invest include equities, treasury bonds, infrastructure bonds and money market funds. I also recommend this amount be enhanced by a minimum of Sh. 20,000 every six months. At month 48 from now when you will be 45 years, the second Sacco loan would be paid off.

The investment in the portfolio can at this time be increased by Sh. 200,000 every six months. At the end of 20 years the amount invested in the above would be Sh. 6,500,000. If the enhancement of Sh. 200,000 is done after every three months, that figure will be near double.

I highly recommend the use of a professional agent to help with building a balanced portfolio that will give maximum return/dividends.

 

A version of this feature was also published in the Saturday Magazine. The Saturday Magazine is a publication of the Nation Media Group.

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