Philip Odhiambo's Financial Dilemma ¶
Philip Odhiambo, a 25-year-old freelance transcription and academic writer, is determined to save Sh. 600,000 in 12 months to buy a plot of land in Kisii. With a monthly income of Sh. 55,000, he has managed to save Sh. 98,000 so far.
However, his monthly expenses amount to Sh. 41,000, leaving him with a deficit of Sh. 4,000. To bridge this gap, Philip needs to cut down on unnecessary expenses and create a savings plan.
According to Chacha Nyaigoti Bichang'a, a personal finance coach at Chachanomics Limited, Philip would need to save Sh. 41,833 per month to realize his goal. This is more than his current monthly budget of Sh. 41,000.
Philip's current savings plan is inadequate, with an average savings rate of below 10-30 per cent. To rectify this, Chacha recommends cutting down on rent, family expenses, and entertainment costs.
By reducing his rent to Sh. 5,000 and cutting down on family expenses by half, Philip can save an additional Sh. 2,600 and Sh. 2,500, respectively. He can also do away with expenses on entertainment and friends to save an additional Sh. 10,000.
These cuts will give Philip Sh. 15,100 every month and Sh. 181,200 in 12 months. He can then pool his savings in a reputable Sacco that pays at least 10 per cent on dividends.
At the end of the year, Philip will have a total of Sh. 279,200, which includes savings of Sh. 181,200 from his expenses cuts and Sh. 98,000 which he has already saved. If he earns dividends at a rate of 10 per cent, he will get an additional Sh. 27,920 to make total savings of Sh. 307,120.
This amount will be sufficient for Philip to access a Sacco loan of up to Sh. 921,360, which will be more than his budget of Sh. 600,000. Alternatively, he can add the balance between his income and expenses of Sh. 14,000 to his savings.
By sustaining an income of Sh. 55,000, Philip can save an additional Sh. 168,000 to make a total of Sh. 447,200 without dividends and Sh. 491,920 with dividends at 10 per cent. This will give him access to a loan of up to Sh. 1.475,000, which is enough to buy the plot and build a simple home.
However, instead of taking the loan route, Philip can extend his timeline to buy land in 12 months by 6 to 12 months. Within 18 months of diligent saving, he will manage to have Sh. 737,880 and Sh. 983,840 within two years.
It is also commendable that Philip has a budget for emergencies, which should be saved in a Money Market Fund where interest will be compounded. He may also consider hiving off Sh. 500 and enlisting for health insurance under the NHIF to caution him in the event of a medical emergency.
Originally published in the Saturday Magazine on May 29, 2022.
